GUEST POST: Why Investors and Politicians Love the Multilevel Marketing (MLM) Industry
Contributed by: William W. Keep, PhD
Hello Reader! I’ve been so busy preparing for this year’s #MLMconf (the virtual conference coming up on March 13th—go register if you haven’t already, it’s free!) I haven’t been able to write the Business Opp Rule Comments wrap-up post I want to. Fortunately, Professor Bill Keep of The College of New Jersey: School of Business, has offered this fascinating look into the politicking we all know happens behind the scenes of the MLM industry as a guest post.
Why Investors and Politicians Love the Multilevel Marketing (MLM) Industry
William W. Keep, PhD
Corporate capitalism means: “the amount of power and influence corporations and large business interest groups have over government policy, including the policies of regulatory agencies and influencing political campaigns (see corporate welfare).” With the increasing amount spent each election cycle candidates ask donors, corporate PACs, and what OpenSecrets.org calls company “Affiliates” for more.
Donations and lobbying from one industry stand out. Not because it fears regulations that might stifle technological innovation, inhibit research and development of life-saving drugs, or hamstring the flow of capital to grow industries but because it apparently fears transparency. What could happen if verifiable information interferes with the self-serving industry patter with documented misleading claims where the vast majority of participants lose money? Perhaps the MLM industry knows, and perhaps that is why some leading MLM companies disproportionately fund politicians and lobbyists. Representing less than 1% US Retail Trade with a steadily declining share over the past twenty years, MLM companies created quite the political presence that extends decades (here, here, and here). The charts below tell part of the story.
OpenSecrets.org and publicly available data chart the political contributions by company “Affiliates” (e.g., an OpenSecrets.org term referring to company PACs, executive giving, etc.) of three large MLM companies – Primerica, Amway, and Melaleuca and firms in much, much larger industries that face regulatory oversight – Meta (technology), Pfizer (pharmaceuticals), and Goldman Sachs (financial services).
Except for 2012, MLM company “Affiliates” generally spent more on political donations as a percent of revenue than the non-MLM firms, and in some cases much more. Melaleuca stands out, often outspending the others by multiples. In 2016, 2018, and 2020 Amway “Affiliates” ramped up giving relative to earlier years.
Some readers might argue that two of these MLM companies are not public and, therefore, of no interest to investors. Because regulations impact an entire industry, efforts to forestall regulations will be of interest to anyone benefitting from the industry’s current situation. Amway and Melaleuca appear to be exerting exceptional financial efforts and serve on the BOD of the U.S. Chamber of Commerce, an organization apparently more concerned with finding hidden regulator agendas than misleading or deceptive business practices.
Decades of efforts to forestall regulatory oversight of the MLM industry have benefitted politicians and investors. Politicians get funds and investors, including some of the biggest investment firms in the country, get returns from a high-margin industry rife with documented consumer harm. One politician noted that supporting the industry is about “jobs and growth and about individuals being able to own their own businesses.” Given her favorable experience selling books in college for Southwestern Company decades ago, did she not need to see the actual current data?
The Federal Trade Commission (FTC) issued multiple warnings to MLM companies and the Direct Selling Association (DSA) regarding misleading product and earnings claims (this is not your grandmother’s Avon lady). And a number of MLM companies have been subject to enforcement actions based on pyramid scheme complaints, including members of the DSA. At the same time, public MLM companies produce above-average margins, to the delight of America’s biggest investors (e.g., BlackRock, Vanguard, State Street, Renaissance Technology, FMR, etc.). There are multiple ways to protect margins (e.g., patents, brand loyalty, etc.), including spending to forestall regulatory oversight that threatens to make verifiable information more readily available.
When money talks someone has to provide the words, and that is the role of lobbyists. The chart below combines political donations with company-specific lobbying expenditures. When it comes to political giving as a percent of revenue Primera does not stand out. When adding lobbying expenditures it leads the pack, spending more as a percent of revenue than all of the other five firms. By 2016 the three MLM companies are spending multiples as a percent of revenue relative to Meta, Pfizer, and Goldman Sachs. Either they are profligate spenders or they think they are getting their money’s worth.
Within the past twelve months, the FTC published two Advance Notices of Proposed Rulemaking, one regarding earnings and money-making claims and the other changes to the current Business Opportunity Rule. Both could impact the MLM industry. Industry comments deliver chest-thumping patter about self-regulation (that does not work) and the wonders of people creating their own business.
Warren Buffet famously said, “It’s only when the tide goes out that you learn who’s been swimming naked.” Effective FTC Rules could reduce misleading claims, increase the availability of verifiable information, and provide data on the probability of success. The tide of misleading information will go out. What is the MLM industry afraid of?