Wall Street is not much interested in the overbilling scandal at Fleishman-Hillard's Los Angeles office. It involves, after all, only a few people from a single office of a single division of the global giant Omnicom Group Inc. a company made up of hundreds of individual units.
Omnicom stock hit a 52-week high of $87.39 a share on Jan. 18, five days after John Stodder, a former Fleishman vice president, was indicted on charges that he fraudulently billed L.A.'s Department of Water & Power on a $3 million annual public relations contract.
A $3 million contract for a conglomerate with revenues expected to reach more than $10 billion this year is not a material concern. In fact, there has been no mention of ongoing investigations in Omnicom's filings nor in any of its press releases. Omnicom spokeswoman Pat Sloan declined comment on the matter, referring queries to Fleishman-Hillard.
"When you look at the portfolio of companies that Omnicom has, Fleishman is like a pinky nail in the annual report," said Mike Paul, president of MGP & Associates PR in New York and former vice president and senior counsel at Hill & Knowlton's New York office.
Far more important to Omnicom these days, at least at the bottom line, is the impact that Procter & Gamble Co.'s pending acquisition of Gillette Co. is likely to have on billings. Gillette spent $812 million on advertising for the first nine months of 2004 and much of that business was handled by Omnicom units. Omnicom shares fell after the acquisition deal was announced, and Deutsche Bank projected that $100 million in Omnicom revenue could be lost if the Gillette work gets dropped.
That the brouhaha over Fleishman's L.A. contract, along with scattered embarrassments at other Omnicom units, would have little effect on the corporate entity speaks to how the advertising and public relations business has changed over the past decade or so. Once a hodgepodge of largely privately held agencies, the industries have undergone massive consolidation that has resulted in smaller shops being bought up by slightly larger ones, which in turn have been sold to still larger ones.
The result has been the expansion of international powerhouses such as Omnicom, Interpublic Group of Cos. and WPP Group plc. But unlike roll-ups in other industries, the acquired operations in P.R. and advertising often retain their name and identity rather than being amalgamated into a larger entity. This reflects the importance of maintaining ongoing relationships with clients who would prefer to work with individual units within the conglomerate rather than the conglomerate itself.
"In an agency, you watch your assets walk out the door at 6 o'clock," said Jerry Swerling, director of public relations studies at the USC's Annenberg School of Journalism and its Strategic Public Relations Center. "It's still all about the people. Different firms have different cultures that appeal to different professionals. And an agency's culture becomes an important attribute."
The upshot is that the parent firms tend to have a much lower profile than the divisions within that parent (often not even being mentioned in marketing materials). At the same time, these conglomerates do not report the results of their various divisions in annual reports.
In its 2003 annual report, Omnicom divided revenues into only four categories. Traditional media advertising, the largest of the categories, generated $3.7 billion that year, or 44 percent of total revenues. Public relations, the category that includes Fleishman, had generated $955 million, or 11 percent.
The result is an environment in which individual units tend to operate separately, and specific financial information is shielded from public view.
"These conglomerates are very fragmented," said Michael Nathanson, media analyst at Sanford C. Bernstein & Co. LLC. "A corporate officer in New York has not a clue about what's happening at the client level across the country in terms of a billing issue. It's just not material."
Fiscal responsibility at conglomerates like Omnicom often ends up on the shoulders of the managers running the regional or local offices of each division. Local offices sometimes attract entrepreneurial types who are responsible for pursuing new business.
"Headquarters will know you've got the client, but they won't know the details of the account," said Swerling, who previously ran the California office of Porter Novelli, an Omnicom division. "You rely very heavily on people in the market and very heavily on the people who head that particular practice or that office."
Within that framework, some argue that ethics are not a primary concern. "There's a healthy cynicism that's endemic in all advertisers that their agencies are probably not Boy Scouts," said Jim Singer, vice president of global management consulting firm A.T. Kearney in New York.
But Omnicom units have been making headlines on several ethics-related fronts, besides Fleishman's L.A. office.
Ketchum and Fleishman-Hillard were named in separate reports by the Government Accountability Office during the past year for violating federal laws against funding "covert propaganda."
The GAO reports said both firms created video news releases without disclosing their affiliation with the government agency benefiting from the videos. The videos are narrated by individuals who appear to be reporters and often are broadcast by TV stations during news reports.
Ketchum was embroiled in another scandal involving conservative commentator Armstrong Williams, who did not disclose that his company was paid $240,000 by the public relations firm on behalf of the U.S. Department of Education.
When the Williams scandal first broke, executives at Ketchum denied that the firm had any responsibility for disclosing the matter. A few days later, they apologized, calling the decision to pay Williams a "lapse in judgment."
Meanwhile, Shona Seifert, president of the New York office of Omnicom's TBWA/Chiat/Day unit, is now on trial, accused of inflating bills to the federal government for work on the White House anti-drug campaign. The allegations against Seifert involve her work at Ogilvy & Mather, a unit of WPP, which withdrew $850,000 in undocumented billings on the contract and paid a $1.8 million settlement in early 2002. Seifert has taken a leave of absence from her current position at Chiat.
Omnicom itself is the subject of several proposed class action lawsuits filed in New York that allege the company and its senior executives gave false and misleading accounts of growth figures, investments and obligations related to acquisitions in 2001 and 2002. The company would only say it expects to defend these cases vigorously.
Paul, president of MGP & Associates PR, said company officials at Omnicom have not taken their own public relations advice.
"The public is talking about it and you have to satisfy the public with your answers," he said. "You can't say other organizations have similar problems, or there are a few bad apples. Spin doesn't work. Truth works."
But Richard Kline, Fleishman's regional president, senior partner and L.A. general manager, calls the recent billing fraud allegations "an aberration." "It appears to have involved a small number of people who are former employees, and L.A. is one of 75 offices we operate around the world," he said.
Still, he acknowledged that several changes have been made since the allegations first surfaced last summer, such as the launch of a refresher workshop on billing procedures and a 24-hour hotline for employee complaints. Also, managers are now required to sign a statement certifying that billing information is accurate, while human resources staff members in the division's corporate office are encouraging employees to report concerns during exit interviews.
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