Shareholder Value, and the Threat to Ad Agency Viability

For more than two decades, “shareholder value” has been the corporate mantra in the Western world. Nothing matters as much as promising and then delivering value to shareholders in the form of profitability, growth, and ever-increasing share prices. CEO and senior executive remuneration was increased dramatically to create personal financial incentives – ensuring that executives had sufficient “skin in the game” to keep the profit machine purring. Procurement departments and management consultants were empowered to slash costs wherever possible. Marketing spend was put to the test, and if it could not justify itself, it, too, was slashed. Where did this leave ad agencies? Caught between their cost-cutting clients and their profit-hungry owners. The outcome has thus far been a strategic disaster.

Agencies have had to match costs and headcounts to declining client fees. For the most part, this has meant that headcounts and salaries have been severely constrained. Traditional agencies have found it difficult to invest in digital capabilities, for example. All agencies have seen their workloads grow faster than either income or headcounts, so that more work has to be done by fewer, more junior people. Quality has suffered. The length of the typical advertiser-agency relationship has declined to somewhere between two and four years, barely long enough to have the slightest impact on brand equity, customer satisfaction or brand sales. Agency salaries are no longer competitive in a marketplace that includes Google, Facebook, Twitter, Bain, McKinsey, and The Boston Consulting Group as competitors for talent.

The fact that SOW workloads are not formally negotiated in the setting of fee levels has contributed enormously to the gap between actual workloads and inadequate headcounts.

Agencies insist on positioning themselves as “creative,” but their clients are looking for “results.” An entire industry cannot be "creative;" only a few agencies can make the claim with any credibility. It would be better for all if agencies learned to refocus their efforts and capabilities to deliver results – that’s the only way they can begin to enhance their fees to get out of the shareholder value doom loop.

The forthcoming Kraft – Heinz merger will focus, we are told, on “zero-based budgeting.” That’s the same thing as saying that shareholder value will rule the day. Ironically, though, the marketing and ad agency fee cuts that will result from this will undoubtedly undermine the basis for future Kraft / Heinz brand growth.

Shareholder value not only weakens ad agencies; it impoverishes brands at the same time. In the meantime, the only real wealth creation, quite sadly, is in the Executive Suite. 

Credit: Jack Ziegler / The New Yorker / The Cartoon Bank. With permission.