Frenemies: The Epic Disruption of the Ad Business (and Everything Else) (26 page)

What wasn't typical was the tension. It wasn't just the pending ANA report. Many delegates arrived on edge because of an ugly and well-publicized sexual harassment lawsuit filed just days earlier by
J. Walter Thompson's communication chief, Erin Johnson, against her boss, global CEO Gustavo Martinez. Johnson's court papers claimed Martinez subjected her “and other employees to an unending stream of racist and sexist comments as well as unwanted touching and other unlawful conduct.” Once, she said, he approached her desk and told her to follow him “so he could ‘rape' [her] in the bathroom.” Another time he allegedly interrupted a meeting with sixty employees, including females, to ask Johnson “which female staff member he could rape.” She alleged that he described African Americans as “black monkeys and apes,” and said he and his wife disliked living in Westchester County because he “hate[s] those fucking Jews.” Johnson said she complained to various officials at J. Walter Thompson and parent company WPP, and they either excused his behavior, assured her they would talk to him and didn't, or cautioned:
Don't harm your career!

Martinez issued a public statement flatly declaring, “There is absolutely no truth to these outlandish allegations, and I am confident that this will be proven in court.” WPP initially issued a statement saying an internal investigation found no evidence that Johnson's claims were true. The company placed her on paid leave while Martinez continued as CEO. Days later, WPP announced it had hired a law firm to investigate. On the eve of the conference, Martinez withdrew from appearing on a 4A's panel and, “by mutual agreement,” stepped down as CEO and was replaced by Tamara Ingram, a seasoned WPP executive. Over coming months, WPP was assailed by Johnson's lawyers for opposing the lawsuit and for implicitly defending Martinez. Asked whether WPP was complicit, Martin Sorrell said WPP had offered Johnson another job and continued to pay her. As for Martinez, he said, “You don't try people in the court of public opinion.” (WPP attempted to have the lawsuit dismissed, and in December 2016 the court ruled against them; in the winter of 2017, the case was still alive and, despite the sexual harassment claims, it was revealed that WPP
placed Martinez in charge of its operations in his native country, Spain.) In April 2018, WPP paid to settle the case.

Erin Johnson did not attend the conference, but her story certainly did. It brought back memories. In
Mad Men
days at J. Walter Thompson, bathroom signs bellowed
GENTLEMEN
. Women found their bathrooms behind unmarked doors. When Marion Harper, the CEO of IPG, in 1966 offered Mary Wells Lawrence a promotion and the salary and authority of the president of Jack Tinker & Partners, he said he couldn't offer her the title. “It is not my fault, Mary, the world is not ready for women presidents.” She promptly quit.
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More recently, the 3% Conference, which promotes female creative agency leadership, reported that although women comprise half of agency employees, only 11 percent of creative directors are female (and less than 1 percent of marketing executives were black women). Reflecting a common perception among women in advertising, one hears complaints about the social activities that male colleagues organize—golf outings, watching sporting events like football, steak dinners—that make them feel like outsiders. “I don't want to whine, ‘Oh poor me!' That's wasted energy,” Wendy Clark said before going to Miami, recalling that several years ago when she joined a new company (that she declined to name), “in my executive package I was referred to as an employee and my husband was ‘a trailing spouse.' He has an MBA, and he looked at me and said, ‘Really? I'm a trailing spouse?'” She laughs, knowing the employment forms were created by men who assumed that women trail men.

The frustration of female executives spilled out at the 4A's. In her welcoming remarks to open the conference, Nancy Hill, whose career was in advertising, immediately raised the case of Erin Johnson: “Unfortunately, the alleged behavior does happen. And it happens more
frequently than we think.” She pleaded for “a very frank conversation” about sexual harassment in the industry. “Real change,” she insisted, “has to start at the top.” In an address minutes later, Wendy Clark kept the sexual harassment issue alive by declaring, “Fundamentally, we have to pull back the curtain on this discussion and as an industry use confabs like this to share our best thinking and best ideas.” In a fireside chat on the second day, Carolyn Everson was asked how the industry was doing in regard to gender equality. “I don't think we're in a good place at all,” she answered, citing as evidence: “There's not a single country in the world where more than 6 percent of their CEOs are women. The needle hasn't moved.” Choking back tears on one panel and sparking a rousing ovation, Chloe Gotlieb, senior vice president and creative director at R/GA, chastised her industry: “Where are the people of color? We're a white industry!”

Also, a white male-dominated industry.
Business Insider
released a report on the sixteen highest-compensated (salary, stock options, and other incentives) advertising executives in 2015 and all sixteen were white males. Topping the list were three holding company CEOs: Martin Sorrell ($87,500,000), John Wren ($23,576,047), and Michael Roth ($14,458,102), with Maurice Levy ($2,900,000) falling closer to the bottom of the list.

When Maurice Levy was the keynote speaker the first morning, he and Martin Sorrell wound up trading insults. For those who have long followed their clashes, the feud between the diminutive British bulldog and the tall, elegant Frenchman with a full head of wavy grey hair brings to mind Donald Trump's tweets: neither Sorrell nor Levy can resist the pleasure of inflicting pain on a perceived enemy. Their clash at the 4A's concerned the allegations of sexual harassment at WPP.

The Gustavo Martinez incident and Erin Johnson's lawsuit arose when Maurice Levy spoke. He did not attack WPP. Rather, he told the
audience he did not believe the alleged extreme behavior of Martinez was typical. “It's a one-time mistake, a huge fault. But it's not a fair representation of our industry.” Levy was not challenging the claims made by many female speakers at this 4A's that the industry lacked diversity, that it was guilty of offering too few opportunities to women, and had succumbed to what Carolyn Everson of Facebook would later tell the audience was “unconscious bias.” He was simply claiming that Martinez's alleged extreme behavior was not the norm.

The next day, Sorrell appeared via a video hookup for an interview and deftly changed the subject from the behavior of the J. Walter Thompson CEO to Levy's behavior. He “violently” disagreed with Levy, he said. “Maurice has a habit of ignoring the facts in getting to his opinions.” This was among the milder things Sorrell has said about Levy.

When asked about Sorrell after the 4A's, at first Levy said he did not wish to offer a description, and added, falsely, that in the past when he has offered criticism of Sorrell it “was always in reaction, unfortunately.”

What was the crux of the problem between them?

“You should ask Martin.” He paused as if he would say no more, but he could not contain himself: “I think the problem he has, besides the fact that I am twice as tall as he is, I think there is a problem with competition. . . . There are two brands in the advertising industry, Sorrell and Levy.” Besides, he added several sentences later, “He doesn't like the French. He considers that we are second-class citizens.” Levy traces their bad blood back to their competition to buy Young & Rubicam in 1999, and then in 2003 the British agency, Cordiant.

A fair amount of rage
and gloom was expressed throughout the conference. The chairman of the 4A's, Bill Koenigsberg, stunned conferees with his opening remarks when he said, “I'm pissed off.” What angered
him is something that has long infuriated agencies: clients induce agencies to make free spec pitches during agency reviews, which burden agencies with about $400 million in free employee hours. “Our product is being devalued. We have to stop the insanity of giving away our work for free.” On a panel with Vice cofounder and CEO Shane Smith,
New York Times
CEO Mark Thompson borrowed from
Game of Thrones
and predicted that winter was coming for the advertising industry; Smith chimed in, “You're going to see a bloodbath” of consolidation in the industry. In a talk on “Making Advertising Matter Again,” Jeff Goodby, cofounder and cochair of Goodby, Silverstein & Partners, talked about some of the ad campaigns he crafted, not including the one he would do pro bono against Donald Trump's candidacy for president. (The Trump ad featured video of proud moments in American history—landing a man on the moon, inventing rock 'n' roll and the Internet—and closed by saying that we didn't do all this “just to be laughed at by the entire world in November.” The ad closed with a close-up of Trump's face and, in large text, the words “History is watching.”
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) Goodby appeared in a black jacket and black mock turtleneck, with a long, silver ponytail sliding down his back, and made a declaration creatives have made for decades: the only way “to save advertising” from low morale and from 70 percent of employees seeking new jobs was to reinject enthusiasm into the business by regaining a sense of creative “vandalism.” He explained: “Like good advertising, good vandalism is funny, loud, and still there the next day.”

In “The Truth About Talent” panel, a LinkedIn senior director, Jann Schwarz, who is their liaison to the giant holding companies, recounted the results of a joint study with the 4A's to explore the
reasons professionals fled agency jobs. The survey sample was large, consisting of 300,000 professionals worldwide and 10,000 professionals who had switched jobs. While the foremost reason cited for leaving agencies was “lack of opportunities” to advance and a desire for “more challenging work,” the survey also noted that the average first-year agency salary “is $45,000 less than in the technology sector.” The median salaries for copywriters ($51,030), account executives ($45,338), or art directors ($56,263) ranked near the bottom among industries; the average starting salary at ad agencies ($25,000) was almost three times below that of management consultants ($70,000). Of college grads, thirty-one-year-old Rob Fishman, the cofounder of Niche, which recruits influencers to promote brands on digital sites, would say before the conference, “I don't know a single person who wants to work in an ad agency. It's not like it was in Don Draper's day.”

Indeed. A study under the direction of Scott Galloway, a marketing professor at New York University's Stern School of Business, reported that 2,227 of WPP's employees left to go to work for Google and Facebook and only 124 joined WPP from the tech giants. “The ad world today is increasingly run by the leftovers,” Galloway writes in his 2017 book,
The Four: The Hidden DNA of Amazon, Apple, Facebook, and Google
. WPP disputed his facts, saying their data revealed that only 200 left for Google and Facebook in the past year and a half and about 70 joined WPP.

Another panel, “The Future of the Industry,” Rishad Tobaccowala of Publicis, Rob Norman of GroupM, and Scott Hagedorn, then CEO of Annalect, tried to inject some optimism into the proceedings. “We have a front-row seat at the nexus of disruption,” which creates opportunities, Norman said.

“The future is likely to be far brighter than the past,” said Tobaccowala, emphasizing that with the advent of digital and a proliferation
of competing platforms, marketing opportunities will rise as traditional advertising declines. “We have to stop being insecure.”

“There's no better time to be in this business,” said Norman, mentioning the knowledge their global businesses could glean from the rise of video versus television in China, the different marketing successes in India (like P&G's Ariel detergent campaign), the e-commerce lessons taught by Amazon (which boosted sales by offering free delivery and streaming TV and movies for an annual subscription to Amazon Prime).

When asked why advertising did not seem to work in the Republican primaries despite huge TV expenditures by candidates like Jeb Bush, Norman, as marketers are apt to do, turned that negative into a positive: “If you have any doubt about the power of branded content, think of
The
Apprentice
!”

A K2 investigator said he thought the rebates could be classified as “civil or criminal fraud,” because “publicly traded companies are required to disclose their finances, and they didn't.”

It was a few days before the long-awaited ANA report was to be released on June 7, 2016, and Michael Kassan remained convinced its conclusions would be devastating for the giant holding companies, who he thought were in denial as to the seriousness of the claims against them. He had made a bid to conduct the investigation, seemingly unmindful that he would be investigating many of his own clients. In hindsight, he realized he had been lucky to be passed over to conduct the ANA probe; had he been awarded the contract he would not have been able to accept the new clients clamoring for MediaLink to review their agency contracts. He was also aware that the sleuthing work would inevitably strain relations with his friends, especially with Irwin Gotlieb.

Kassan was right about the report's harsh conclusions. After conducting 143 interviews and inspecting e-mails and other documents over 8 months, the core conclusion of the 58-page K2 report was that there is “a fundamental disconnect in the advertising industry regarding the basic nature of the advertising-agency relationship.” Advertisers believed “that their agencies were duty-bound to act in their best interest. They also believed that this obligation—essentially, in their view, a fiduciary duty—extends beyond the stated terms in their agency contracts.” In this expansive view, the agency was an agent of the client. The narrower contractual view publicly proclaimed by Irwin Gotlieb, and shared by many agency executives, the report said, was “that their relationship to advertisers was solely defined by the contract between the two parties.”

The report affirmed the broad charges lodged by Jon Mandel. Rebates were common in the United States, the report concluded. “K2 interviewed 41 sources who reported that media rebate deals occur in the U.S. market.” Of the 41 sources, 34 said the rebate information and monies were not shared with advertisers. Media companies who sold the ads secretly kicked back to agencies between “1.67% to approximately 20% of aggregate media spending, depending on the deal.” The rebates took different forms, from cash to free ad inventory to debt forgiveness to benefits like equity in the media company. The most common way the rebate system worked, said the report, is that the agency holding companies used their purchasing power to buy discounted advertising time, which they then resold at a higher rate to their individual agencies who buy this ad time for clients. The lower purchase price paid by the holding company was not disclosed to the client. The report also said that holding companies often directed that ad dollars be shoveled to media companies they partially owned. This served the interests of the holding company, but these ad platforms were often extraneous to the client.

This would not be the first time a holding company was called out for extracting rebates. In 2008, the Securities and Exchange Commission imposed a $12 million settlement on IPG for rebates its McCann-Erickson agency demanded in violation of its contracts with clients. Nor would it be the last. Two months after the ANA report, the
Guardian
in England disclosed that it pays rebates to agencies, including “free advertising space, cash payments, or both.” And in September 2016, a scandal surfaced in Japan when an important client, Toyota, complained that Japanese advertising giant Dentsu falsely billed them for digital ads that did not appear. After an audit, an embarrassed Dentsu announced that it would repay 111 advertisers a total of 230 million yen (roughly $200 million).

The report acknowledged the fairness of complaints agencies often lodge against clients. In new business pitches by agencies, the report said, clients were too often preoccupied, not with marketing strategy or fresh creative ideas, but with the agencies' fees. The rise of procurement officers, the report conceded, meant constant cost pressures since marketing was usually viewed as a cost, not an investment. And with the end of the commission system, agencies sometimes struggled to make money. Clients were often guilty of not auditing their contracts to learn if agencies were in compliance. And ANA president Bob Liodice admitted that his client constituents were often asleep when it came to rigorous audits and contracts, conceding that “the behavior on the client side was a little more paralyzed than one would have liked.”

But the thrust of the report was a clear condemnation of the agencies. They were found guilty of engaging in secret rebates, of acting in their interests, not the interests of their clients, and of a basic lack of transparency. (Of the six holding companies, the report said they interviewed executives at all six but that only IPG officially cooperated.) The ANA emphasized the trust issue. “Advertisers and their agencies
are lacking ‘full disclosure' as the cornerstone principle of their media management practices,” Liodice said in a prepared statement. “Such disclosure is absolutely essential if they are to build trust as the foundation of their relationships with their long-term partners.” The report, Liodice declared at a press briefing, “represents an opportunity to rebuild agency/client trust.”

He promised that by July the second company involved in the investigation, Ebiquity, would release transparency principles for his seven hundred members. The ANA urged its membership to reexamine all its agency contracts.

Requesting anonymity, a K2 executive was harsh, saying he thought the rebates could be classified as “civil or criminal fraud. In addition, publicly traded companies are required to disclose their finances, and they didn't. There are a number of different angles a regulator or a prosecutor could use as a hook.”

The report was vulnerable to criticism. Because no guilty agencies were identified by name, and because the charges were anonymous—“K2 found substantial evidence of non-transparent business practices in Agency Holding Companies, as well as in certain independent agencies”—all but the smallest agencies were tarred with this broad brush. The name-no-names approach was promulgated by the ANA, as the report says: “From the outset, the ANA made clear to K2 that the goal of the study was not to embarrass or accuse any individual or corporate entity of malfeasance.” Instead of singling out this or that agency for malfeasance, the report leaves the impression that all, or at least most, agencies are miscreants. Since the report fails to name client victims, all clients are left to wonder whether they might be victims.

The agencies were livid. In a public statement, the 4A's denounced the report, saying it is “anonymous and one-sided and paints the entire industry with the same negative brush.” They bridled that the
ANA was treating their agency partners as targets of an investigation, even though the introduction to the report repeatedly claimed this was a “study,” not an investigation. Yet when asked whether his failure to name names slandered innocent agencies, former federal prosecutor and principal author of the report, Richard Plansky, described his work as an investigation: “I don't think that's a valid criticism. When you do an investigation and sources are ‘at risk,' it is standard industry practice to grant them confidentiality.”

Attorneys for WPP and Omnicom had their law firms dispatch letters to the ANA demanding proof that they extracted rebates. Each holding company denied they pocketed rebates in the United States. Martin Sorrell and Irwin Gotlieb publicly questioned the motives of K2 and Ebiquity, charging that both firms had an ax to grind because they were angling to become the go-to auditors for advertisers. Irwin Gotlieb went further, questioning the assumption animating the ANA report that agencies are agents for their clients. Gotlieb measures his words carefully and his answers to questions arrive as if in slow motion. In his office, he was asked, “Does GroupM receive rebates in North America?”

He waited seconds to answer before stating flatly, “Zero rebates in North America.” There followed another long pause, before he continued: “We've been very clear. We are not an agency.”

If they were not an agent of the client, he was asked, were they a partner?

“I wish we were a partner. Ad agencies when they were formed acted like the seller's agent, not the buyer's agent. Look at who paid the commission. It was the seller. Somehow it evolved into a relationship where there was an assumed fiduciary responsibility to the client. However, contractual terms that have come into common practice, particularly over the last dozen years or so, are the kinds of terms that can't be reconciled with an agent-type relationship. I will give you
three examples: An agent can't be held to deliver specific costs per thousands. Clients often ask us to provide guarantees and to put our fees at risk. It's become common practice.” Second: “Agents don't offer extended payment terms”—meaning they will not get paid for months—“which are now routinely demanded by clients. We're not a bank.” Third: “Agents aren't asked to indemnify clients for IP violations on technology. We're not an insurance company.” Feeling pressured by clients to reduce their fees, and pressured by their holding companies to produce profit margins approaching 20 percent, and increasingly vexed by insecure relationships with clients, agencies don't feel as if they have signed a marriage vow.

This is one big takeaway from the ANA report: agency and client often don't share a common definition of their role, and thus mistrust arises. When agencies aggressively seek new ways to generate income, like employing their own funds to gamble on buying ad time and later selling it at a higher rate, they think they are serving their fiduciary responsibility to shareholders; clients think of them as unfaithful. Clients say agencies are taking rebates that deprive them of money; holding companies say they are taking risks with their own money and being rewarded for it. The drive by holding companies to tap new revenue streams serves as evidence to clients that the agency has mistresses. When Dave Morgan of Simulmedia looks at how agencies, backed by the 4A's, insist that in the new world they must be allowed “to trade on their own behalf” and maintain “undisclosable deals with media suppliers,” he concludes that this translates to rebates: “It's pretty clear that the parsing of language became a big issue in the allegations and denials of rebate activities in North America. Not unlike, ‘I didn't inhale.'”

After reading the report, Rishad Tobaccowala of Publicis came away with two opposite conclusions. Agencies are at fault, he says: “There's a lot of truth in that report. We're trying to sell all the time.
We don't listen enough to our clients. We have to help our clients prosper. Yet the ANA report is the biggest mass suicide of CMOs. The ANA hired the hit man who in hitting the agencies also hit them by making them look like they did not understand the space or how to steward the money. The report helps give power to the CFOs and procurement officers, which spreads more distrust between client and agency.”

By mid-2017, there was scant evidence that as a result of the report clients had reduced their ad spending with agencies, or whisked their business from the large holding companies to flee to smaller, independent agencies. Agency executives, in effect, boasted:
Look, there have been no indictments or charges filed against any of us.
However, what is clear is that the ANA report has had a poisonous impact on the trust client and agency require to partner. Clients are wary, often maintaining more of an arms-length relationship with their agencies. And many agency executives are dispirited. “We've been assaulted in the trade publications as crooks, with no letup,” says a senior agency official who does not want to be named. “By the way, your family reads this stuff too.”

There was one other clear outcome: Once again, the report meant more business for Michael Kassan and
MediaLink.