Distinguishing legitimate direct selling from pyramid schemes

ETHICS plays an important role in many areas of our business world. Take direct selling, for instance. How can you tell the difference between a legitimate business and a disguised pyramid scheme? To answer this question, we need to back up and look at what "ethics" are all about and, why they are important. Then we will look at the legitimacy of the two direct selling methods.

What are ethics? Here is the most recent textbook definition from a college MBA (Masters in Business Administration) updated required reading selection, "Ethics are the moral principles that govern the actions and decision of an individual or group," Marketing 7th Edition (Kerin, 2003, 100). In other words, to choose a course of action in moral situations, we use ethics, our cornerstones or guidelines to follow.

Why are ethics important in the business arena? Because every person is a part of the whole and similar to an apple, when one person or portion of the fruit turns bad, the rest is affected. Or in the words of John Donne (1572-1631), "No man is an island, entire of itself; every man is a piece of the continent, a part of the main..." And business is no exception. Every one in the business arena affects everyone else. If a company steals from one person or group, their actions affect many. And people who aid in this immoral schematic, help steal from the whole society. Thus good ethics is good business.

About 80% of businesses establish a code of ethics, a formal statement of business principles and rules of conduct, according to Marketing 7th Edition. Usually this code covers issues like bookkeeping, professional conduct, objectives, general standards and government factors. For example Rule 202 of the Compliance with Standards section in the Code of Professional Conduct for the American Institute of Certified Public Accountants states:

member who performs auditing, review, compilation, management consulting, tax, or other professional services shall comply with standards promulgated by bodies designated by Council. (et202.htm).

An example of code in the general business community can be taken from the Direct Selling Association's (DSAs) Code of Ethics, "No member company of the Association shall engage in any deceptive, unlawful or unethical consumer or recruiting practice."

Unethical Corporation Behavior

Now we can look at how to tell the difference between a legitimate business and a disguised pyramid scheme. First we refer to the DSA and see if the company in question fits into their Code of Ethics. In a nutshell, the DSA says that pyramid schemes seek to make money from you (and quickly) whereas multilevel marketing companies seek to make money with you as you build your business (and theirs) selling consumer products.

Then you need to ask yourself these three questions:

1. How much are you required to pay to become a distributor?

Will the company buy back unsold inventory?

People in Level

And so on. The result should be that for an initial investment of $1,ch investor would make a total of a cool million in cash or something like that. But what happens is that after a couple people bite or pay into the system, interest drops off and everyone is out money who originally invested. They get nothing back. And the guy who started the plan made his money and left town.

What can be done to encourage better ethical behavior? A complete investigation into all business practices should be made before entering into business with another party. Use the guidelines from the DSA as a start, but refer to the Better Business Bureau and Federal Trade Commission for additional information. Both groups have criteria for measuring accounting practices, director responsibility, program feasibility and overall accountability of the company under investigation. They can help you with background information gathering and checking. So there is no need to tackle the entire decision-making process on your own. Remember, "no man is an island"!