Earlier this month, The Intercept published the first installment in a series looking at alleged incidents of fraud and ongoing mistreatment of sales associates at AFLAC Incorporated (NYSE: AFL). Although shares of Aflac fell by almost 8% when the report was initially released, much of the lost ground has since been regained. The allegations range from serious incidents of fraud, reminiscent of the Wells Fargo & Co (NYSE: WFC) scandal, to misleading promises made to sales recruits of unattainable riches.
Aflac responded almost immediately, saying it had "investigated these claims and found them to be without merit."
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But what should investors do? Let's take a closer look at the allegations and Aflac's response to see if this is a buying opportunity for investors or a time for shareholders to re-evaluate their position in the profitable insurance underwriter.
A closer look at the allegations
While there was a laundry list of complaints alleged in the Intercept piece, not all of them were examined in detail in the first installment. Allegations include:
- Classifying sales associates as independent contractors when they should have been treated as employees.
- Pressuring sales associates to sell policies to themselves and family members, rather than providing them with other leads.
- Manipulating operating metrics to "prove company growth" to investors.
- Paying managers money that was due to associates.
- Pressuring sales associates to sell policies without the customers' consent or authorization.
- At least one charge of sexual harassment.
While none of these claims paint the company in a flattering light, they vary greatly in severity. Unfortunately for investors, the most serious of these were left to be detailed in later installments, including the charges of sexual harassment, manipulation of numbers, and the opening of accounts without policy holders' consent.
However, this installment did explore the poor conditions sales associates were allegedly forced to endure while being classified as independent contractors -- including no minimum wage, no compensation for extensive travel and educational costs, and being forced to pay Aflac for the use of office space. These conditions, unsurprisingly, have led to a great deal of churn, forcing Aflac to heavily recruit new members with greater promises of wealth that never seem to materialize.
The Intercept also noted that in 2017, Paul Amos II, the grandson of Aflac's founder, abruptly resigned from the company and sold approximately $17 million worth of stock. This sale prompted a class-action lawsuit by employees for insider trading while holding material, non-public information.
Aflac's spirited response
In the days following the initial accusations, Aflac mounted a spirited comeback. In a press release, the company said:
The press release also said these accusations were coming from fewer than 10 individuals out of a pool of more than 70,000 licensed sellers and brokers of Aflac products. The company further took the opportunity to remind shareholders and the public of its many awards for being a good company to work for and its years of dedicated charitable service.
Aflac also released the findings of a special committee appointed by the company's board to explore the matter once it was notified of the allegations last year. The report stated that the special committee dedicated over 500 hours and reviewed nearly 630,000 internal documents and found no merit to the charges of improper insider selling. The special committee is currently investigating the additional accusations that it received later.
What's an investor to do?
This is a tough question to which there is no right or wrong answer. I would caution against adding shares or initiating a new position until you have time to read the original article and Aflac's response. Even after doing so, I would advise waiting to buy shares until all the charges are presumably fleshed out in future Intercept pieces. Wells Fargo was widely considered the best big bank in the industry...until it wasn't.
I also subscribe to conscious capitalism -- the idea that a corporation should maximize value for all of its stakeholders: shareholders, employees, vendors, and customers. While I've had no complaints as a shareholder of Aflac, I had previously thought the same could also be said of its customers and employees. Now I'm not so sure.
I also wonder whether high churn among sales associates is even a good long-term business strategy. Perhaps providing sales associates with more support and better pay would lead to lower churn and a more productive sales team.
If -- and that's still a big "if" in my mind -- Aflac is fraudulently opening accounts in customers' names and knowingly recruiting salespersons into a losing proposition just so it can enroll their friends and family members in insurance plans, then it's not a company I'd care to own. Because my shares were held in a tax-deferred account, I sold my position in Aflac soon after the scandal broke. I'm waiting to see how the rest of the story unfolds before deciding to buy back in.
Hopefully, clarity will come as soon as the company's fourth-quarter earnings report. At the moment, my crystal ball is cloudy, and I have no idea how this story will play out. I still like the business model and will look for an entry point in the future if my concerns are resolved. But at this time, the uncertainty surrounding these allegations is too much for me to bear, so for now, I'll watch this story unfold from the sidelines.
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