Business Ethics – Nu Skin Faces Pyramid-Scheme Allegations in China

Business ethics Nu Skin Faces Pyramid-Scheme Allegations in China

Overview of the company

Nu Skin is a company that sells personal care products and nutritional supplements. Nu skin is an international company that operates in five continents, and is based in over 50 different countries. Nu Skin was established in the united stated in the year 1984. After a few years, the company had a massive growth and started expanding globally. A couple of years after that their first operation in Asia opened. The firm became a publicly traded when it issued its first offerings publically in 1996. The same year Nu skin bought the pharmaceutical company pharmanex , from then on their product offerings were sold under both brand names. One of their new products called Lifepak a supplement that the company markets as being able to balance the perfect level of minerals, antioxidants and vitamins in the human body. LifePak now makes up about fifteen percent of the sales the company makes. Although Nu Skin is a relatively new company with barely 30 years of history, it has grown to become one of the top direct selling companies in the world. In 2013 Nu Skin generated a revenue close to 4 billion dollars. Nu Skin uses multilevel marketing to perform their operation. Multilevel marketing means that the company hires independent contractors to sell and distribute their products, the independent contractors can market the product any way they want, meaning there are multilevel marketing in the way that every contractor markets the product in a different way. The independent contractors can be seen as being owner of the company, and having the sole proprietorship in the way that they are buying products from Nu Skin and reselling by the same name. Nu Skin can be seen as a supplier to many companies, but in reality all the independent contractors all go under the same company. The independent contractors can also recruit other independent contractors, whenever they recruit a new contractor they earn a bonus and also gain some percentage of the sales made from their new recruits. This is how the independent contractors earn bonuses and upgrade in the ladder of the company. After achieving a specified amount of sales, and recruiting a certain amount of new independent contractors, the contractor can become an executive leader and earn a much higher percentage of commissions. The company describes itself of providing opportunities to entrepreneurs from all sorts of interests especially since there is no risk like there is from starting your own business. The independent contractors’ only liabilities are the products they buy, and there is a buy back guarantee for unused resell able products that can be used after 12 months from the time the products were purchased. Over forty percent of the company’s profits are paid to the independent contractors as compensation. The multi layers of marketing happens because there are many levels of contractors, and the multiple ways of marketing come from the fact that every contractor markets the products their own way. Nu skin is famous for their products having anti aging properties, and for their products to slow down the aging process. In total Nu Skin has a product line of over 200 anti aging personal care products and supplements. The Asian market is huge for Nu Skin, especially china. Nu Skins operation in china has proven to be very successful and profitable. Around one third of the revenues are being generated in china with Over 400,000 independent contractors in the Chinese market. The company now was a strategic planning to make their overall profits reach 10 billion dollars by the year 2020 mostly due to their success in china. In china they have laws to prevent direct selling companies such as Nu Skin to use multi level marketing, for this reason they run the business differently in china. In dependent contractors cannot recruit, therefore they will not earn any commissions, instead they sell to local retail stores. Although the company has had great success in China, there have been some accusations that the company operates an illegal pyramid scheme. The company denies all of these claims of an illegal pyramid scheme, but the company has been under investigation and faces challenges due to these allegations. The current chief executive officer M. Truman Hunt has been with the company for three years, and in those three years he has lead the company to reach worldwide expansion. Nu skin now trades shared over their IPO price, and there has been a 500 percent increase in the stock price after M. Truman Hunt became the Chief executive officer. M. Truman Hunt became known as the chief executive officer of the year by Utah business magazine in 2012. Two years later he got the direct selling award and became a chairman of the association of U.S direct selling. Nu skin was awarded a A+ with the bureau of better business and still keeps that rating, meaning that the company conducts business in a ethical way.

Social responsibility

Being socially responsible is important to Nu Skin. The company now has a taken use of the for profit initiative called Nourish the Children. Nourish the children produces the product called VitaMeal . VitaMeal, this is a food supplement that is equal to thirty child portion meals. The local population gets hired in the production factories, this provides jobs for many locals. Independent contractors can also gain from this entrepreneurial opportunity by purchasing products and donating them to charities that will give the products to children in places where they have a high rate for malnourishment. Over three hounded and forty million meals have been distributed around the world via this initiative. Nu Skin gained the bravo humanitarian award in 2011 for their very positive influence on the society. In 1996 the company created another initiative called the Nu skin force for good. This foundation has helped many people all over the world. They built a village that could be used as a living classroom, to educate the local farmers and to help them acquire new agricultural skills. The company donates 25 cents from every epoch baobab body butter products to the Malawi hope for seeds project. The project is to purchase seeds and plant the trees in places where deforestation has occurred and also for farmers that live in poverty to grow plants and trees that can become a source of earnings. Fruit trees are particularly good, also when planting more trees the quality of the soil increases. The company raised over two million dollars at their thirtieth anniversary party, and the money they raised was used to supply school supplies and children’s books to educational facilities in rural areas. The company also raised money for children in Asia that were in need of different types of surgeries and for the refurbishment of orphanages. The Force for Good Foundation would like for their contractors to help out in their local communities as well. The company’s headquarters have a day where all of the workforce can donate kits to their communities. They donate to a number of charities including charities that provide food for those stricken by poverty and charities that provide day care for children. Nu Skin is now on Forbes list of the most trustworthy companies and has been since 2010.

China allegations

There has been a lot of work for the independent contractors working in the big Chinese market, and a lot of revenues generated there. However there have been some ethical matters regarding the company and their independent contractors. Since every contractor is marketing differently and on their own terms it is difficult for the company to monitor all of them. Some of the independent contractors working in china have marketing their products with medicinal properties that are not correct such as being a cure for cancer and other illnesses. Many also claim that the contractors are using the direct selling as a way of building their pyramid scheme empires and deceiving the government and the public. There have been many researches published about the company’s alleged illegal acts of multilevel marketing in china, pyramid schemes and exaggerated advertisement of their products and lying about their business. There have also been some claims that the company has brainwashed their independent contractors to make them sell more than they are allowed. Right after these allegations an investigation into the operations of nu skin was announced by the industry and commerce’s administration in china. At the same time another report was released by people’s daily that stated the company was doing multilevel marketing. In china being part of a multilevel marketing for direct selling companies is very negative, and it was even illegal in china to operate a direct selling business before 2006. The government still does not allow multilevel marketing in direct selling companies, and if any company is found to be using this system they will be shut down and fined. The reason it’s illegal is because in china they believe multilevel marketing is too close to a pyramid scheme, to make sure that direct selling companies are not operating by using a pyramid scheme the Chinese government monitors these companies and certain professions are not allowed to be part in direct selling. The government in china also put a limit to the percentage the independent contractors are getting from commissions from their recruits. It is also mandatory that these types of companies provide a return and refund policy for their contractors. The company’s stock price decreased with thirty eight percent in two days after the release of the accusations. The Chinese market is very important for Nu Skins profit, considering the elderly population is dominant and is expected to increase to about seventy million in the next ten years. This represents a lucrative market for their anti aging products. If the company was found to be doing illegal acts it would harm and handicap the growth of the company in the Chinese market. The company fights back the allegations and state the reporters are merely writing rumors and not trying to investigate the whole story. The reporters again say that they believe Nu Skin is taking part in unethical acts although the company denies being part of any pyramid scheme. Under the company’s first review there were some direct sellers that were found to have gone against the selling guidelines made by the company, because they are not under supervision on a day to day basis, there will always be independent contractors that will misrepresent the company’s products. The Chief executive officer of Nu Skin M. Truman Hunt believes that there needs to be a strong code of ethics to prevent the independent contractors from doing unethical acts. He also blames the fast growth of the company to them not being able to monitor their sellers better, leading them to violate the guidelines made by Nu Skin. The company did write a letter that stated they would review their selling practices and train the employees and new recruits to ensure that they are educated about the company’s selling practices. Nu Skin promised to work with the investigators that had doubts about the company’s acts, although Nu Skin made these assurances some of the shareholders still filed a lawsuit against the company claiming that they engaged in acts that could harm the overall good of the company and lead to the loss of money for the shareholders. Stock prices fell continuously but have increased again since that time. Eight analysts foresaw that the company would only get a small fine for the lawsuit filed against them, and that made the other shareholders and investors sure that the fall in stock prices was going to be short term. The CEO plays a key role in speaking for the company’s ethical or unethical acts as the leader of the company, and having his named mentioned in the lawsuit. The Chinese government fined the company for five hundred and forty thousand dollars in 2014, this was for direct selling some of the products that only retail stores were approved to sell, also for exaggerating their products without proper evidence. Six other independent contractors were fined with two hundred and forty one thousand dollars for promotion products although there were not authorized to do so.

Ethical and unethical acts made by the company

In this case study about the company Nu Skin and the problems it faced in their operations in china, there have been some ethical issues that can be explained using multiple theories. We will look at how ethical or unethical the company is according to each theory. The first theory is the deontological theory, if we follow this theory the ethical acts are the once that go with your duties and maxims. In this theory whatever you do is considered to be ethical as long as it’s your right to perform those actions, there is no regard for the aftermath of the consequences that happen as long as what you do is your right. According to the deontological theory the independent contractors are behaving ethically, because it is their right to market the products. When an independent contractor is requited, that person is considered to be the owner of his own business and can sell the company’s products and market them anyway they please because it’s their right to do so. There are two types of deontological theories, those are the agent centered theory of deontology and the patient centered theory. According to the agent centered theory the ethical acts are those that you have a personal obligation to different from other people, meaning that the independent contractors are being ethical because they have a obligation towards themselves to act in their own best interest to generate more profits, even if it means over exaggerating the product line and selling products although only retail stores are authorized to do so in china. In the patient centered theory on the other hand deals with others rights rather than your own, meaning they have the right to know exactly what products they are getting without being fooled by marketing tools, so according to this theory the independent contractors are behaving unethically. The second theory is consequentialism, according to this theory the act that has the most positive effect or consequence is the most ethical one. If we follow this theory as long as the customers don’t know that the products are not as good as marketed the independent contractors are acting ethically because the effect would be negative for the business if sales went down which would happen if customers didn’t believe the products were effective. There are two types consequentialism theory and those are egoism and utilitarianism. In egoism the ethical act is the act that maximizes one’s self interest, the independent contractors are thinking about their own personal wealth when marketing these products and over selling, so according to egoism they are acting ethically. In utilitarianism the ethical act is the one that give the greatest good or happiness to the greatest amount of people, it is concerned with collective happiness and not individual happiness. The public are not goint to be happy if their products are not as good as they expected them to be, and when this happens the public will not buy any more products from Nu Skin leading in the fall of their stock price that will in return not please investors, the independent contractors are mainly thinking about their own personal good, and the greatest amount will suffer, so according to utilitarianism they are acting unethically. The third theory is the shareholder theory and here the ethical act depends solely on the interests of the company’s shareholders, the ethical acts are those that are the most profitable for the company so that the shareholders can gain more. If a company is socially responsible, this promotes the shareholder theory. When businesses are socially responsible more people are going to want their products making the shareholders better off. As soon as the reports of Nu Skins allegations were published the stock price for the company fell down drastically, and shareholders even sued the company for allowing their independent contractors to violate company policy. According to shareholder theory the independent contractors acted unethically. The final theory is stakeholder theory and in this theory the ethical act a company does should be the act that serves the interests of its stakeholders. Stakeholders include employees, customers, suppliers and investors. The over exaggerated marketing is not in the best interest of the customers, they are getting their hopes up, the investors also suffer when the public realizes the products are not as good as they are advertized as, then stock prices fall. The employees also suffer because now the company will be stricter with recruitment and employment, whoever wants to become an independent contractor will have to go through a training period and once they become employed the company will monitor them more often. For the reasons above the acts of the company is unethical according to stakeholder theory.

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