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July 01, 2015

Industry with Heart

Creating a Rigorous Compliance Culture: A Mannatech Case Study

by DSN Staff

Click here to order the July 2015 issue in which this article appeared or click here to download it to your mobile device.


About eight years ago, Texas-based Mannatech Inc. was in a fight for its survival. The nutritional products company, which had built its reputation on the effectiveness of its plant-based supplements, was facing serious charges—in both courtrooms and the court of public opinion—that the products were being deceptively marketed as treatments or cures for diseases. Sales plummeted, and company executives were faced with the enormous challenge of stabilizing the business and restoring a path for growth.

Robert SinnottRobert Sinnott

The management team succeeded. After five years of losses, Mannatech (MTEX—NASDAQ) returned to profitability in 2013 and showed significant improvement in 2014, with net sales growing 7.1 percent from $177.4 million in 2013 to $190.1 million in 2014 and net income more than doubling for the same period.

During the long road to recovery, Mannatech CEO and Chief Science Officer Robert Sinnott, Ph.D., oversaw the development of a rigorous compliance culture. The company works diligently to make sure that everyone—from the chairman down to the newest independent associate—markets its nutritional products as supplements to promote overall health and wellness, rather than targeting any specific illness or ailment. In a series of recent interviews, Mannatech executives shared their journey with Direct Selling News, offering lessons learned and strategies to help other direct selling companies navigate the challenges inherent in managing an independent salesforce.

Situational Analysis

Mannatech was founded in November 1993 and held its initial public stock offering in February 1999. In 2001, J. Stanley Fredrick, an experienced direct selling company owner and a past chairman of the U.S. Direct Selling Association, became one of the company’s largest beneficial shareholders and joined the board of directors. Sales grew steadily, and in 2006, Mannatech ranked No. 5 on Forbes’ list of the 200 Best Small Companies. A year later, BusinessWeek ranked it No. 12 on its list of 100 Best Small Companies to Watch.

Al BalaAl Bala

“If the promise of the direct selling business model is some form of long-term income, it has to be based on a foundation of compliance, which ensures the long-term viability of a business.”

—Al Bala, President


Legal challenges brought that growth curve to a screeching halt. In 2005, a group of shareholders filed a class action lawsuit accusing the company of violating securities laws by knowingly allowing members of the independent salesforce to misrepresent the efficacy of Mannatech products and, in doing so, artificially inflating the value of the company’s stock. In July 2007, the Texas Attorney General charged the company with violating the state’s Deceptive Trade Practices Act by making unsubstantiated claims that Mannatech products could treat and cure various ailments, such as cancer. The situation drew the attention of national media organizations, including The Wall Street Journal and the TV show 20/20, generating a raft of negative publicity. The Great Recession that hit the U.S. and global economies in 2008 served as a double whammy. Many consumers found themselves with significantly reduced disposable income, and many others were fearful they would be the next to fall victim to the market turmoil.

The challenges were real and severe. Although Mannatech reached an agreement with the Texas Attorney General’s office, settling the enforcement action without admitting any wrongdoing, the lawsuit was a blow to the company’s reputation. The number of active associates and members began to decline in 2008, and with that, net sales dropped 58 percent from $412.7 million in 2007 to $173.4 million in 2012.

“The numbers were a real wakeup call,” Fredrick, now Chairman of Mannatech’s board, says.


Success meant finding a way to keep the sales messages simple and clear without overreaching on the product claims.


Tackling Compliance

The first order of business was to tighten up sales and marketing guidelines and to ensure that everyone consistently complied with the standards. As every direct selling company executive knows, this was no small task. Mannatech closed 2007 with 575,000 associates and active members selling a portfolio of sophisticated nutritional products. Success meant finding a way to keep the sales messages simple and clear without overreaching on the product claims, permanently removing any discussion of the products being able to cure, mitigate or prevent any disease.

In 2007, Mannatech eliminated the practice of allowing third-party vendors to sell or distribute materials to share Mannatech products. Today, the company offers standardized personal web pages for associates, and associates can use only corporate-approved marketing materials, which are available through a resource library. They also have access to recurring training on compliant marketing and advertising. “The goal is to create compelling, compliant and consistent messaging across the board,” says Sinnott.

Mannatech also actively monitors the marketing messages surrounding the company and its products. Associates are required to report their websites to the legal and compliance department, and the company conducts random checks of other online communications, such as Facebook, Twitter and blogs. The company employs a third-party web crawler to pick up references linking Mannatech and its products to disease claims, as well as potential trademark infringement and other adverse materials. The legal and compliance team receives regular reports from the service and contacts associates to go through a compliance review process when needed. The tool also provides reports regarding unauthorized online sales and issues cease-and-desist letters on Mannatech’s behalf for potential trademark infringement cases.

Mannatech headquarters in Coppell, TexasMannatech headquarters in Coppell, Texas

Associates also play a key role in ensuring compliance. In 2005, Mannatech began contracting with Ethicspoint, an independent company that maintains a hotline-style service where people can anonymously report possible violations of the company’s Business Code of Conduct, Code of Ethics and Associate Policies & Procedures.

“We do everything we can to provide our associates with a strong, safe and compliant foundation on which they can build their business,” says President Al Bala. “However, we have specific rules, and consequences for breaking those rules, including having to move on from individuals who endanger the company by straying from the right path. We stress that compliance is both a corporate and field responsibility in our goal toward creating a long-term, sustainable business.”


After five years of losses, Mannatech returned to profitability in 2013 and showed significant improvement in 2014, with net sales growing 7.1 percent from $177.4 million in 2013 to $190.1 million in 2014.


With the business back in growth mode, Mannatech is not letting up on its compliance work. In late 2014, Mannatech added Linda Ferrell, Ph.D., a marketing and business ethics expert, to its board of directors. Ferrell recently completed nine years on the faculty of the University of New Mexico and is joining the Jack C. Massey School of Business at Belmont University this fall. She is a member of the Direct Selling Education Foundation’s board of directors and serves as President of the Academy of Marketing Science. At Mannatech, she chairs the board’s subcommittee on Associate Compliance, a group that she describes as supporting ways for Mannatech to partner with associates to help build successful and sustainable businesses in a safe, compliant environment.

“Mannatech’s membership in the Direct Selling Association and adherence to one of the best industry codes of ethics demonstrates their commitment to upholding the highest integrity of business conduct,” Ferrell says. “Their commitment to their customers, associates, and the industry (through the DSA and DSEF) is significant and impactful.

Linda FerrellLinda Ferrell

“[Mannatech’s] commitment to their customers, associates, and the industry (through the DSA and DSEF) is significant and impactful.”

—Linda Ferrell, a marketing and business ethics expert and Mannatech board member


“I also admire Mannatech’s commitment to social entrepreneurship and the impact this has on a global basis in the health and well-being of children. Their products are making a difference in people’s lives globally.”

Managing Expenses

Mannatech’s executive team knew from the outset that resolving the company’s regulatory challenges would not be enough to restore its financial health. Cost-cutting became a matter of survival.

Payroll was one of the key categories. Mannatech had 610 employees at the end of 2007. In July 2008, the company eliminated 60 positions, 15 percent of its U.S. workforce; six months later, it cut another 25 permanent and contract positions. Headcount has gone down every year since then, even as the company has added new international markets and introduced new products. At the end of 2014, Mannatech employed 270 people.

Mannatech also outsources its manufacturing, which has helped the company stay nimble, and Vice President, Global Operations Landen Fredrick spearheaded a process of controlling raw material costs.

By the end of 2010, expense control efforts were in line with the sales decline, and Mannatech was again generating positive cash flow, which could be used to grow the business. In the second quarter of 2011, Mannatech began aggressively working to reduce its operational expenses. In 2012, for example, it cut selling and administrative expenses by more than $10 million and other operating expenses by more than $8 million.

“In the past several years we’ve had to make some difficult decisions; but, in the end, the choices we made have created a stronger Mannatech that serves our customers, associates, employees and shareholders better than ever,” Fredrick says. “We adjusted staffing to align with our global expansion efforts and outsourced some of our services to reduce costs and increase efficiencies. These efforts enabled us to grow and have brought us back to profitability. Today, we are expanding and are building our teams up around the world.”

J. Stanley FredrickJ. Stanley Fredrick

“In the past several years we’ve had to make some difficult decisions; but, in the end, the choices we made have created a stronger Mannatech that serves our customers, associates, employees and shareholders better than ever.”

—J. Stanley Fredrick, Chairman


Building the Top Line

The third part of Mannatech’s recovery story is ongoing: rejuvenating sales.

Bringing value to end consumers in the form of unique products based in nutritional glycobiology is a key to the company’s strategy, and from the outset of its financial trouble, the executive team was careful not to let cost-cutting measures deter the company from continuing to develop new products. In 2012, it launched NutriVerus, a unique multivitamin powder that combines several core Mannatech technologies. In 2013, it followed up with Uth, a glyconutrient-based skincare system. And in 2014, the company introduced GlycoBOOM, a potent immune system booster.

The commitment to research and development continues today. Over the years, Mannatech has committed tens of millions of dollars to perfecting and validating its nutritional glycobiology technology. Some of its product formulations are protected by more than 100 patents. The company even deployed an open innovation system that allows associates to vote on ideas in the product development pipeline. “I think we have the corner on different,” Bala says.

MannatechThrough social entrepreneurship, a donation to nutritional feeding programs is made for each and every sale of a Mannatech product.

New products were just part of the sales strategy. Mannatech also continued to expand into new international markets, even as it worked to decrease the size of its corporate staff. Since 2007, the company has opened 15 additional international markets. Hong Kong and Spain were the most recent additions, in 2014, and plans call for Colombia to open in the third quarter of 2015.

In addition, Mannatech created a new story for associates to share when it introduced its social entrepreneurship model. It is through this model that the company donates its nutritional supplement powder PhytoBlend to a nonprofit organization, Mission 5 Million (M5M), for each order. This charitable work reflects Mannatech’s goal of providing assistance to 5 million malnourished children and allowed the salesforce to rebrand themselves as social entrepreneurs.

“It is so important to our associates and customers to know that the purchase of many of Mannatech’s products triggers a donation,” Fredrick says. “We believe that our products change lives, and the M5M program extends that chain of wellness to children around the world. What does social entrepreneurship mean? It starts with fighting a social problem, such as malnutrition, and creating a business opportunity for those who want to join the fight; thus improving ourselves, our community and the world. Thanks to the M5M program, our associates feel that they are not just selling, but also changing lives through giving.”


Over the years, Mannatech has committed tens of millions of dollars to perfecting and validating its nutritional glycobiology technology. Some of its product formulations are protected by more than 100 patents.


Conclusions

There’s no doubt that Mannatech’s story is a cautionary tale of what can happen when a company runs afoul of government regulators. But its successful recovery offers a road map that savvy executives can use to create a culture of compliance and fiscal prudence throughout their home office staff and their field.

Unsubstantiated product claims hurt everyone involved. Honest marketing is a cornerstone of consumer protection. Without it, a company’s reputation—and that of its independent sales associates—rests on an unstable foundation. But with that cornerstone firmly in place, a direct selling business can provide a powerful, sustainable opportunity for entrepreneurship. As Sinnott says: “The direct selling industry needs to take compliance seriously, because each time a wild claim is made, our industry’s reputation takes a hit…. Starting from the office and extending to our associates in the field, we know that there is no corner that can be cut or detail overlooked. Our message is that Mannatech’s compliance culture creates opportunities for our associates to build strong, safe, long-term businesses.”