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Summary

  • Herbalife's annual proxy is due shortly.
  • 4 Herbalife directors are ending their terms.
  • Will Carole Black and Michael Levitt resign?

Everybody loves a Cinderella Story. You know, the rags to riches tale of an underdog who overcomes despair to achieve freedom and success. Everyone except my neighbor, perhaps, who is a diehard Duke Blue Devils fan.

The film industry has mastered the Cinderella story. Consider the narratives of movies like Rocky, The Karate Kid, Miracle, Tin Cup, Field of Dreams, Pretty Woman, etc. Like maple syrup on a pancake, the sweetness of these tales is simply too much to overcome.

Herbalifers (NYSE:HLF) want business opportunity seekers to believe that theirs is a Cinderella story too. It is no coincidence that the company's CEO is a former Disney executive with an expertise in Marketing and PR. Herbalifers have spent years crafting their Cinderella story for the masses. The only trouble is that Herbalife is not a Cinderella story. The rags to riches promises do not come true for most participants. On the contrary, the Herbalife story is a tragedy.

Q. What do the following people have in common?

  • Michael Johnson
  • Carole Black
  • John Tartol
  • Michael Levitt

If you answered that they are all members of the Herbalife Board of Directors you are correct.

If you answered that their terms as Directors expire this year you are also correct.

If you also answered that they are all wealthy people who sit at the helm of a global confidence game that defrauds low-income "Cinderellas" you might actually be on to something too.

Herbalife has a staggered Board of Directors with 13 members. Ms. Black, Mr. Johnson, Mr. Tartol, and Mr. Levitt were elected to 3 year terms in 2011 that expire at this years AGM. The 2011 proxy can be found here along with more in-depth biographies.

Q. Who are these people?

By now, most people know Michael Johnson and John Tartol. Mr. Johnson is Herbalife's CEO and Mr. Tartol is one of its most Senior distributors. These two individuals are "Herbalifers" who are in the business and help operate the mechanics of the business on a day to day basis. It seems logical to conclude that these two people will be re-upped in the upcoming Herbalife proxy for re-election to the board. We'll see.

As for Mr. Levitt and Ms. Black?

One has to wonder, what possible incentive could these two people have to want to remain on Herbalife's Board for another 3 year term?

Triggering this curiosity was an article published by NY Post columnist Michelle Celarier which revealed that the good ship Herbalife had reached out to Mr. Icahn in support of new board nominees.

This begs the obvious question, is Herbalife intent on expanding its Board from the current 13 members or is someone wisely taking the concurrence of the FTC investigation with their reelection cycle as a prudent opportunity to get out of dodge.

I do not know Ms. Black nor Mr. Levitt, but here are their biographies from the Herbalife website.

Carole Black is the former President and Chief Executive Officer of Lifetime Entertainment Services, a multimedia brand for women including Lifetime Movie Network, Lifetime Real Women Network, Lifetime Online and Lifetime Home Entertainment - where she held the position from March 1999 to March 2005. Prior to that. Ms. Black served as the President and General Manager of NBC4 Los Angeles, a commercial television station, from 1994 to 1999 and in various marketing positions at The Walt Disney Company, a media and entertainment company, from 1986 to 1993. She has served as a director of Time Warner Cable Inc., since July 2006.

Ms. Black is also the current director of an alleged pyramid scheme and a member of Herbalife's Compensation Committee.

Michael J. Levitt is the Chairman and Chief Executive Officer of Stone Tower Capital LLC, which he founded in 2001 as an alternative investment management firm. Prior to forming Stone Tower, Mr. Levitt was a partner with the private equity firm Hicks, Muse, Tate and Furst Inc., from 1996 to 2001. Prior to joining Hicks Muse, he served as a Managing Director and the co-head of the Investment Banking division of Smith Barney Inc, from 1993 to 1995. Prior to this Mr. Levitt was a Managing Director with Morgan Stanley and Co.

Mr. Levitt is also the current director of an alleged global pyramid scheme and a member of Herbalife's Audit Committee.

What can we say about these two individuals?

For starters, these are some impressive CVs earned over a lifetime of investment of energy and hard work. Reputations are a funny thing, however. They take a lifetime to build but can be destroyed overnight.

Secondly, it seems reasonable to conclude that Ms. Black is a Michael Johnson loyalist. The Walt Disney connection seems too obvious to be a coincidence.

Q. If you were Ms. Black or Mr. Levitt and you were asked to remain on Herbalife's Board of Directors for an additional term, what would you do?

Would you accept this Kamikaze mission which would seem to have limited reputational upside with asymmetric reputational downside or would you exit stage left through the unique window of opportunity offered you by happenstance as much as anything else?

A single read through Mr. Ackman's recent letter would certainly make the decision easy for me. With a splash of PR spin and the wave of a wand I would chart my exodus forthwith.

How's this for a hypothetical spin?

After years of dedicated service. Ms. Black has decided not to seek reelection to Herbalife's Board of Directors so that she can pursue other philanthropic opportunities.

or

Mr. Levitt has concluded that his time commitments in other areas of his career make it difficult for him to dedicate the necessary time and attention to Herbalife in the future. We wish him well in those endeavors.

Presto, the pressure cooker is turned off.

To be clear, the fate of Mr. Levitt and Ms. Black is mere speculation on my part. With the upcoming Herbalife proxy likely to appear in the next 3 weeks and the AGM scheduled for April 29, we will no doubt find out their plans soon enough.

Still, this proxy makes for interesting theater. I submit that any director turnover will be seen as a vote of non-confidence in the Herbalife business model. If Ms. Celarier's research is correct, the fact that Herbalife reached out to Mr. Icahn for help seems telling. Still should either Ms. Black or Mr. Levitt make the conscientious decision to move on to greener pastures, could anyone really blame them after all?

Herbalife martyrs do not strike me as sympathetic characters. Rather, they strike me as cynical types who seem to relish the idea that their bank accounts are fuelled by the hard work of a segment of society least capable of fending for itself against a global confidence game.

You see, Herbalife distributorships don't typically appeal to wealthy people who gather exclusively at destinations like the Beverly Hills Hilton for Annual General Meetings. Rather, they crop up in places like Queens, NY or Mexico City where life is hard, opportunities for income are scarce, and people are faithful. What "Cinderella" wouldn't take a chance if invited to the ball by the likes of Prince Tartol?

Why any reputable business person would want his or her brand tied to this kind of company escapes me entirely.

Will a crisis of conscience strike either of these two directors? Will the woman who dedicated much of her career to "Lifetime for Women" show solidarity with her Latina sisters or her career cronie Mr. Johnson?

Stay tuned.

Investment Thesis: Herbalife is a global confidence game that misleads low-income individuals to allocate capital towards a business opportunity that is, in practice, an endless chain. Regulators will shut it down.

Source: Will Carole Black And Michael Levitt Resign From Herbalife's Board?