The Old Regime Is Back at SHAKLEE : Shansby Loses as Founder’s Sons Reclaim Firm

From the very start, it was a marriage of convenience. On one side was the Shaklee family, its leader a charismatic chiropractor who once performed “feats of strength” in a traveling carnival show. With his two sons, he preached a gospel of nutrition and capitalism to legions of dedicated vitamin peddlers who propelled Shaklee Corp. for a time onto the ranks of the Fortune 500 list of the nation’s largest industrial companies.

On the other side was J. Gary Shansby, a blow-dried and manicured marketing man chosen by the family in 1976 to run the company. Shansby won some respect for the company on Wall Street by injecting professional management, hiring more scientists and de-emphasizing what he calls Shaklee’s “tent-show tactics.”

Shansby considered himself the founder of the modern Shaklee Corp. But the rough-hewn Shaklee brothers felt that they were the primary architects of the direct-sales company’s success. With their allies on the board of directors, they tried to force the entrenched Shansby to share his power by installing a vice chairman and creating a committee on strategic planning.

But the turf-conscious Shansby would have none of it. Instead, he called a showdown meeting of the board for Saturday, Dec. 14.

“I’m a founder of this company, too,” he declared, according to several meeting participants.

“You are not,” shot back Raleigh L. Shaklee, who started the company in 1956 with his older brother Forrest Jr. and their father, Forrest C. Shaklee Sr.

Shansby resigned as chairman and chief executive, taking with him a $3.6-million settlement. Paul R. Greenberg, the company’s No. 3 officer and a Shansby loyalist, was terminated. And Robert K. Swanson, chairman of Del E. Webb Corp., quit in protest as an outside director, departing the board room in mid-meeting.

The dramatic denouement, recounted by Swanson and other participants, came as family patriarch and Shansby antagonist Forrest C. Shaklee Sr. lay dying in a nearby hospital at the age of 91.

Known as “Dr. Shaklee” to the company’s sales force and portrayed in company literature as a scientific and philosophical genius, he was a master pitchman, hoisting a hollow ball purportedly weighing 500 pounds at carnival shows and serving as paid protege to a traveling hypnotist named “Professor Santinelli” at about the turn of the century.

In 1915, he picked up his degree in chiropractic from Palmer School in Davenport, Iowa, later barnstorming the state in his Curtiss biplane and winning renown as “the flying doctor.” His also has a doctorate in divinity from the College of Divine Metaphysics in Indianapolis and a doctorate in naturopath from a California college.

Sold ‘Vitalized Minerals’

Specializing in nutrition, he sold “Shaklee’s Vitalized Minerals” (“a concentration of nature’s values”) from his Mason City, Iowa, clinic before moving his family to California and founding Shaklee Corp.

Today, Shaklee’s nutritional products include vitamins and other food supplements, a laxative called Herb-Lax and the Slim Plan diet drink mix. Household and personal care products--all said to be “in harmony with nature”--round out its product line.

The Shaklee brand isn’t sold in stores. Goods are sold directly to consumers by a force of independent sellers who earn cash, cars and convention trips for their efforts. Shaklee’s sales plan provides generous incentives for “sponsoring” new salespeople, so many sellers proselytize. At the end of last year, Shaklee had 7,700 “sales leaders” in the United States and 12,700 worldwide.

With Shansby’s sudden departure and “Dr.” Shaklee’s death, Shaklee’s sellers must look for leadership to President David M. Chamberlain, elevated to chief executive from chief operating officer, and John C. Lorini, a retired management consultant who was named chairman.

Chamberlain and Lorini face a future laden with opportunity and challenges. Shaklee’s balance sheet boasts a cash hoard of $83 million, and the company hopes to raise as much as $40 million this summer with the initial public offering in Japan of a 20% stake in Shaklee’s Japanese unit.

Sales Down Sharply

But Shaklee’s basic direct-selling business is in trouble, with fiscal 1985 sales of $406 million down 25% from their 1983 peak. Its management is peppered with executives loyal to the ousted Shansby.

Moreover, Shaklee Corp. faces the retrial later this year of a bitter Utah lawsuit that it filed against a pair of former distributors after they allegedly embraced a competitor’s products and started disparaging Shaklee’s.

The former distributors, who lost a jury verdict in 1981 that was set aside on appeal, have waged a vigorous legal counterattack against Shaklee. In court papers, they contend that the company “is a hoax and a fraud” with Dr. Shaklee as “a rambling but alluring elderly front man” and “a powerfully effective cult figure.”

Shaklee Corp. tried--but failed--to have the record of the 1981 trial permanently sealed. The record includes testimony from a former Shaklee lawyer reporting the presence of “bags of C&H; sugar” in Shaklee’s plant. (The use of white sugar is a cardinal sin in health food circles.)

The trial record also shows that between 1974 and 1977, alfalfa used in the company’s popular Alfalfa Tabs was fumigated with ethylene oxide, a suspected carcinogen.

Shaklee, which introduced a new heat-sterilization procedure to purify alfalfa in 1977, has defended its past use of ethylene oxide as “safe and responsible.” The company has also vigorously denied other charges in the case.

Beyond that, “it is a pending lawsuit and we can’t comment on it at all,” Lorini said in an interview. (Earlier in the interview, Lorini noted that Dr. Shaklee hadn’t played an active role in the company for at least 10 years.)

Optimistic About Future

Lorini and Chamberlain say they are optimistic about Shaklee’s future in direct sales, a business whose success is dependent upon a company’s ability to recruit, train and motivate its force of independent sellers. Plenty of people “need a good, part-time income,” Chamberlain says, and he hopes to draw new sellers from their ranks.

Shansby, on the other hand, argues that Shaklee’s domestic direct-sales business will “at best stay flat and probably trend downward” as more and more women take full-time jobs and the pool of available salespeople--and buyers--shrinks. This in fact has been the case in recent years for such direct sellers as Shaklee, Amway and Mary Kay Cosmetics.

Shansby says “the Shaklees didn’t want to hear” his downbeat assessment. “This was their baby. This was their child.”

But what brought matters to a head was Shansby’s ardent championship of the initial offering of a 20% stake in Shaklee’s Japanese unit. At board meetings, he argued that it could result in a doubling of Shaklee’s stock price. But the strong-willed executive bred suspicion in family quarters by refusing to take representatives of the Shaklee family on exploratory trips to Japan.

“There was great haste,” Lorini says, and the Shaklee brothers “were having a problem catching up.” The brothers, he adds, “wanted to take a look at how the offering would affect their own balance sheets and tax planning.”

Deal Making Progress

Other directors felt the board needed to have a longer-term strategy in place before going forward with the Japanese deal. Lorini and Chamberlain went to Japan this month, and the company now says the deal is “making favorable progress.”

If Chamberlain and Lorini face formidable challenges, so did Shansby when he assumed the presidency in 1976.

The new chief executive moved swiftly to curb sales tactics that might win unwanted attention from the Food and Drug Administration, which had seized Shaklee products in 1960, 1966 and 1972 for alleged product misbranding. In 1976, Shansby terminated a high-ranking distributor in Minnesota after the man, a polio victim, claimed on television that he’d freed himself from an iron lung by popping Shaklee pills.

Other vestiges of Shaklee’s past weren’t as easily dealt with. For years through the early 1970s, Dr. Shaklee and others had energized Shaklee conventions with rousing speeches containing seemingly outrageous product claims. The motivational speeches were taped and circulated through the Shaklee field organization.

In one memorable tape, Dr. Shaklee recounted how a Shaklee household cleanser called Basic H “went to the moon” with astronauts, who even “washed their teeth with it.” Not so, says NASA.

Then there was the time Forrest Shaklee Jr. told a rapt audience the virtues of “natural” vitamins compared to “synthetics.” Though he has little scientific training, he described an experiment in which he dropped a synthetic vitamin extract on a living cell and a natural vitamin extract on another.

Explained the company co-founder and board member: “The one fed synthetically will go into convulsions and die before your very eyes, whereas when you feed natural substances through the cell it has kind of a radiant glow.”

Called ‘Pure Drivel’

The co-founder’s purported experiment is “pure drivel and utter nonsense,” says Thomas Jukes, professor of biochemistry at UC Berkeley and the former head of the American Institute of Nutrition’s committee on public information.

“Preposterous,” adds Dr. Victor Herbert, professor of medicine at Mt. Sinai School of Medicine. Synthetic and natural vitamins “are identical, down to the last molecule. There is absolutely no difference.”

For Shansby, a skilled veteran of such consumer products giants as Colgate-Palmolive and American Home Products, the move to Shaklee was “like going to work on another planet,” says a sympathizer who has worked closely with him over the years.

Says Shansby: “I was determined to put more emphasis on professionalism and product quality (and) less emphasis on tent-show tactics.” He moved quickly to cut back the Shaklees’ role in the company, a move that coincided with the brothers’ desire for more leisure time.

Using flattery, charm and guile, Shansby persuaded the Shaklee brothers to give up their titles as vice chairmen of the company. He took away their company credit cards and removed their children from the payroll.

More audaciously, Shansby redesigned Shaklee’s corporate headquarters, eliminating the founders’ offices. “He literally brought in the construction workers while the brothers were off on a cruise somewhere,” a source who was there recalls. “He replaced the offices with walls and halls and so forth.”

Company Prospered

If the move hurt their pride, they swallowed it as the company prospered. Sales skyrocketed from $167.5 million in 1976 to a peak of $538.7 million in 1983. The brothers, who control 27.9% of the company’s stock, saw its value climb from less than $2 a share in 1976 to a 1983 apex of $42. It currently trades in the mid-teens.

(Forrest Shaklee Sr. had no significant stockholdings but was paid $150,000 a year as chairman emeritus.)

Still, “I’m amazed that Gary survived as long as he did,” says a former top officer who watched Shansby operate. “In part, the brothers knew that they needed him. But he was also very skillful at playing one brother off against the other.”

Dr. Shaklee, then in his 80s, was a trickier problem. Shansby was well aware of his colorful background as a carnival worker, described in detail in Forrest C. Shaklee Sr.’s authorized biography, “When Nature Speaks.” Shansby was also concerned about spurious product claims.

“A lot of these things were embarrassing to me,” Shansby recalls.

However, Shansby also knew from surveys and personal experience that Dr. Shaklee was revered by the sales force. The executive recalls once “almost saving Doc’s life “ when a stout woman charged the dais at a Chicago convention and flung her arms around the frail old man.

Problem Dramatized

Shansby’s problem with the “doctor” was dramatized at a 1977 convention in London at which Shansby had decided to address a sensitive issue. The executive had concluded that, despite company lore, Shaklee’s products were not “100% natural.” He decided that the sales force would have to stop making “100% natural” claims.

“Imagine being named head of the Macy’s Thanksgiving Day Parade and then having to announce there is no Santa Claus,” a Shansby adviser says. “That’s the predicament Gary faced.”

Over tea in Dr. Shaklee’s suite, Shansby explained the rationale for the change to the elderly man and believed that he’d secured the founder’s cooperation, according to a memo later written by Shansby.

But the doctor wasn’t anout to betray his own legend. Instead, he gave a barbed talk that undercut the new policy and “made a number of illegal comments about the products,” Shansby wrote in his memo, which was stamped CONFIDENTIAL. Enraged, Shansby barred the company founder from speaking at future conventions.

“If he cannot be controlled, we must allow him to only attend as a guest and wave to the crowd,” Shansby wrote in his memo. “Effective immediately, we will no longer tout Doctor Shaklee and use him commercially to sell books, statues or anything else. Shaklee is a public corporation and I have a responsibility as Chief Executive Officer to protect the Company at all times.”

The news that Shaklee’s products were “as natural as possible”--the company’s fallback position--struck many distributors as heresy. Among them were Utah ranchers Franklin and El Marie Gunnell, who had prospered since signing up with Shaklee in 1971.

Mrs. Gunnell says she was so taken by the Shaklee legend that she used to put Shaklee cleanser Basic H--the one that purportedly went to the moon--in her home-baked bread in the belief that the bread would rise higher. (Other salesmen fed Basic H to their cows, believing they would yield richer milk.)

A Way of Life

The Gunnells were terminated and sued by Shaklee when they embraced a competitor’s products and started disparaging Shaklee’s at public meetings. But their earlier belief in Shaklee’s products isn’t unusual. For many Shaklee distributors, Shaklee is more than a business; it is a way of life.

They take Shaklee vitamins. They wear Shaklee cosmetics. They read Shaklee magazines and watch Shaklee videos. They drive Shaklee bonus cars to Shaklee conventions, where they cheer Shaklee speeches and sing Shaklee songs.

But their numbers, especially in the United States, have been shrinking in recent years. Domestically, there were 6,100 “sales leaders” on Sept. 30, 1985, the end of Shaklee’s 1985 fiscal year, compared to 7,400 at the end of 1984 and 8,700 at the end of 1983.

The number of domestic sales leaders rebounded to 7,700 by Dec. 31 after the company lowered by 33% the volume of sales required for the “sales leader” designation. Company officials say it’s too early to tell whether the change will boost overall sales; in fact, first-quarter sales were down 3.4%. “It takes awhile, because this is a momentum business,” Chamberlain says.

Analysts aren’t impressed with Shaklee’s erratic track record though they are far from bearish on the stock. “Until I see some hot new products or sales moving up, I regard Shaklee as strictly an asset play,” says Albert M. Klein of Edward A. Viner & Co., a New York securities firm.

Interesting Speculation

Shaklee’s stock, he adds, “is an interesting speculation for someone with patience who wants to wait for the Japanese deal.” With the high multiples prevalent in Japan, sale of a 20% stake in the unit could add $40 million to Shaklee’s already healthy balance sheet and establish a high value for the remaining 80% of Shaklee Japan.

“Properly done, (the Japanese deal) will probably go through,” Forrest Shaklee Jr. said in an interview from his winter home in Palm Springs.

The co-founder says the field force--which was told in a letter that Shansby’s departure was “friendly”--has reacted “enthusiastically” to the management change.

“This is a people business,” he says. “Most everyone says, ‘Hey, we’re with you.’ ”

The co-founder says he takes strong exception to Shansby’s characterization of Shaklee’s past activities as “tent-show tactics.”

“He’s dead wrong,” Forrest Shaklee Jr. says, adding that “I’m not going to defame anyone’s character, even though it may have been done in reverse.”

Shaklee Corp., he adds, has always been “a good, first-class, legitimate organization. There’s never been any flamboyance, from any point of view.”

Meanwhile, Shansby, after a vacation in Europe, has started to look for a new job, and he isn’t restricting his search to the private sector. The socially prominent Republican Party fund-raiser says he would also consider a university presidency or government appointment. (Friends say he’d jump at the latter.)

“The one thing I can rule out,” says the 48-year-old Shansby, “is direct sales.”