Does Your Agency Agreement Address “Special Relationships?”

29 May

relative party risksWhen it comes to the subject of contracts between advertisers and their marketing agency partners, there is one principle, long understood within the legal, financial and audit sectors that is frequently overlooked… the concept of “Related-Party” transactions.

Why is this important you might ask? Primarily because as principal agent, an advertising agency has a fiduciary responsibility to solely serve the interests of their clients. In fulfilling their role as a fiduciary, agencies are held to a standard of conduct and trust in which they must avoid self-dealing or conflicts in which the potential benefit to the agency is in conflict with that of their client. 

Over the course of the last thirty years, growth within the advertising industry has been chiefly driven by acquisitions and marked by consolidation. The net result was the emergence of large, complex and highly influential agency holding companies such as; WPP, Publicis Groupe, Omnicom, Interpublic and Dentsu. In turn, each of these organizations own dozens of diverse agency brands providing full-service advertising, media, creative, digital and social media, public relations and multi-cultural advertising services and resources. 

Each of the aforementioned holding companies is a publicly traded entity focused on maximizing profits for their shareowners. As such, one of the primary roles of holding company management is to leverage intra-group synergies across their agency brands to profitably drive group revenues. No one would begrudge them this focus, particularly in light of the need to offset acquisition costs and the marketing and operational expenses associated with maintaining dozens of agency brands. 

Unfortunately, advertisers are often unwitting participants in the act of leveraging intra-group synergies. Further, more often than not, the agreements which are in place to formally govern client/ agency relationships do not afford advertisers the requisite controls and or transparency concerning related-party transactions. 

So what is a related-party transaction? In short, related-party transactions can be defined as arrangements between two parties that are joined by a special relationship. For example, if an advertiser’s media agency of record were to funnel a portion of that advertiser’s digital media buy to a digital trading desk operation, which happened to be owned by the media AOR’s parent company that would be considered a related-party transaction. 

While there is nothing wrong with the premise of related-party transactions, they do carry the potential, or at least perception, for conflicts of interest. This may be as simple as an agency awarding work to a related party, rather than competitively bidding that work to a range of providers. Further, undisclosed, these transactions can mask the overall percentage of an advertiser’s budget being spent through their agency, its parent and subsidiary companies.  

Fortunately, this issue is easily addressed in the context of a client/ agency agreement. The first step is straightforward and involves defining the terms “related-parties” and “related-party transactions.” Secondly, it is imperative that advertisers introduce standards for the identification of agency related party relationships that may come into play on its business and to provide disclosure requirements for when an agency seeks to engage a related-party. At a minimum, such requirements should include: 

  • Identification of the related-party and the nature of the relationship
  • Statement of the business purpose of the transaction and why the related-party is being considered
  • Securing the requisite transparency controls ranging from access to invoices, compensation agreements, contracts and audit rights with regard to the related-party
  • A list of client personnel authorized to sign and approve related-party transactions, in advance of work being awarded 

Too often client/ agency agreements do not establish guidelines for behavior in this area. When combined with the fact that agency operating styles sometimes do not openly reveal related-party transactions, a control gap is often created, which can have negative financial consequences for the advertiser as well as blemish the agency relationship. 

In our agency contract compliance auditing practice, we have found that the best approach for all stakeholders when it comes to related-party transactions is total transparency. As President Calvin Coolidge once said when speaking about “living right:”

“The right thing to do never requires any subterfuge, it is always simple and direct.”

If you would like to like to learn more about client/ agency contract “Best Practices” please contact Cliff Campeau, Principal at Advertising Audit & Risk Management via email at ccampeau@aarmusa.com for a complimentary consultation on this important topic. 

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