Global Advertising Data SOX-ed up

by: John Sinclair / Victoria University, Melbourne

Those of us with an orientation towards political economy and an interest in how the advertising industry propels media development have lost a lot of wind from our sails with the Sarbanes-Oxley Act that was passed by U.S. Congress in July, 2002. The purpose of the Act is to protect investors from financial scams in the wake of Enron, Worldcom and other scandals, by considerably tightening the rules regarding the disclosure and verification of financial information (and especially claims of revenues or profitability) by publicly-listed companies.

In particular, the Act requires the CEO and CFO of such companies to prepare a statement accompanying their audit report to certify the ‘appropriateness of the financial statements and disclosures contained in the periodic report, and that those financial statements and disclosures fairly present, in all material respects, the operations and financial condition of the issuer’. In other words, the company’s principal executives personally have to verify declared figures.

The implications this has had for the advertising industry is that it has put an end to the various annual rankings which, until Sarbanes-Oxley, or ‘SOX’ as it has been dubbed, would be published by trade journals and professional bodies, not just in the US, but internationally. In the US, the annual league tables would be compiled and made widely available, most notably in Advertising Age; in Australia, it was done by AdNews and B&T Weekly; in the UK, income tables were produced by the Institute of Practitioners in Advertising (IPA); and in Europe, by the Research Reports on Agency Media Networks service (RECMA).

For once, critical political economists and large corporate advertisers have found an interest in common that has been affected by the new law, as neither group has a comprehensive league table of advertising agencies’ annual performance any more. Not that anyone in the past took the rankings as an accurate measure. Advertising agency income is made up of ‘billings’, the amount of their clients’ money that agencies spend on buying advertising time and space in the media, as well as fee-for-service activities. Billings figures always were rubbery, because they would necessarily include estimates from shared accounts and from subsidiaries, as well as income earned but not yet secured. Therefore they could easily be inflated to give the impression an agency was doing better than it actually was. So, they always had to be taken with a grain of salt anyhow.

However, since SOX, agency principals do not dare to put their name to a dubious set of figures, and some CEOs even seem to be relieved to be able to shelter behind the new law, after having risked exposure for so many years. As one senior advertising executive in Australia commented, ‘Once upon a time, the release of the rankings was the great event of the year. It was quite good sport and everyone treated it with the humour it deserved. It’s a shame it got abused’.

OK, so the game’s over. But how is it that the effects of a US Act of Congress are being felt in Australia, the UK, Europe and elsewhere? Because of the globalization of the advertising industry, and the integration of US-based agencies within the largest agencies of all the major nations that have a commercial mass media system. Although some US agencies had already opened up offices outside of the US before World War II, the 1960s saw a wave of expansion into Europe, Australia and other former British dominions, and also the newly independent developing nations. The agencies were following the prior expansion of their clients to a large extent, the new ‘transnational corporations’, but also the dynamics of an emergent international manufacturing–marketing–media complex. They had enjoyed growth in the US, thanks to the first decade of television, and this gave them expertise (‘American know-how’ is a phrase of the era) that was advantageous in other national markets where television was more recently introduced. The bulk of the Australian advertising business was taken over in the 1960s by US agencies, that either set up their own subsidiaries or entered into various arrangements with Australian agencies.

Thus began the present era, in which the largest advertisers, mainly transnational, or more accurately now, global corporations, do their business with the largest agencies, and television takes an ever greater share of revenue. The largest agencies are also global, though US ownership and control has been greatly attenuated, not just in Australia but in comparable markets, by significant participation from UK, French, and to a lesser extent now, Japanese agencies.

One crucially important global trend of recent decades has been that in which several large international agencies — transnational corporations in their own right — form what the trade press calls ‘supergroups’ or ‘megagroups’. These groups do not operate as unified advertising agencies, but as holding companies which have a management and financial coordination function at a stratospheric level around the planet: this integrates the activities of the group’s member companies in marketing communications (such as market research and public relations) with the advertising agencies and their clients on a global basis.

A notable case is the British group WPP, which in the last decade has acquired agencies that had long been identified with the US, notably Young & Rubicam and J. Walter Thompson. Similarly, the French-based Publicis Groupe has Leo Burnett from the US as well as one-time British star agency Saatchi & Saatchi in its stable. The largest three agencies in Australia are all Australian-controlled, but they all have some minority ownership from the US or UK, so they cannot be said to be Australian-owned. The point is not so much that US capital is being replaced by British and French in the advertising industry, but rather, as in most truly global industries, the nation of origin is becoming irrelevant.

The passage of SOX will make global trends so much harder to track. As well as the WPP and Publicis agencies mentioned above, other major agencies in Australia which no longer cooperate with the trade journals’ annual rankings include Grey Global Group and those in the US-based Omnicom Group (e.g. DDB) and Interpublic Group (McCann-Erickson). So, while SOX might give protection to US investors, this has been achieved at the expense of the public interest on a global scale.

Links:
Guide to the Sarbanes-Oxley Act
Latest on trial of former Worldcom chief executive Bernie Ebbers
The Sarbanes-Oxley compliance kit

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