By Alvin J. Silk, Lincoln Filene Professor Emeritus, Graduate School of Business Administration, Harvard University, USA, firstname.lastname@example.org
What restrictions should be placed on advertising agencies with respect to serving accounts or clients who are competitors of one another in order to avoid conflicts of interest? In recent decades, the advertising and marketing services industry has undergone a number of structural changes that forced an ongoing re-examination and modification of traditional norms and policies emphasizing exclusivity in agency–client relationships. A typology of conflicts that have arisen in the U.S. shows the variety and complexity of contemporary conflicts. Cases of conflicts reported in the trade literature are used to illustrate policy issues as well as the spillover effects and resolution of disputes.
To cope with these developments, two significant changes in conflict policies evident in current U.S. practice are identified. First, safeguards to preserve proprietary information that function as organizational, location, and personnel mobility barriers among quasi-autonomous units within a mega agency or holding company have become an essential component of conflict policies. Subject to the protection against security breaches afforded by safeguards, rival clients may be served by separate organizational units that are under common control and/or ownership. Second, a family of hybrid conflict polices has evolved that feature elements of the split account system long practiced in Japan, augmented by safeguards that serve as partial substitutes for the umbrella prohibition on serving rivals imposed by exclusivity. By relying on safeguards and splitting account assignments in a variety of ways among different organizational units within a given mega-agency or holding company that may also serve rivals (or across different mega agencies or holding companies), clients exert a measure of control over the access of those agencies to confidential information while also offering them incentives to avoid conflicts of interest.
Findings from the existing body of conceptual and empirical research bearing on the sources and consequences of conflicts are reviewed and directions for further research are discussed.
Despite its history as a contentious issue in agency-client relations, conflicts of interest remain a relatively undeveloped topic in both the professional and academic literature on advertising and marketing. As a step toward the development of a deeper understanding of the state of contemporary practices relating to conflict norms, Conflict Policy and Advertising Agency-Client Relations surveys and integrates three somewhat disparate bodies of relevant material that are available. First, an examination of the history of the advertising industry in the U.S. and Japan serves to inform our understanding of the development and functioning of the principal contending policy options: the exclusivity norm and the "split account system," respectively. Second, analysis of press accounts of specific conflicts and policy guidelines issued by trade associations illustrates how the re-structuring the U.S. advertising industry over the past three decades has affected potential threats of conflicts and means for addressing them. Third, a handful of theoretical and empirical studies are available that offer valuable insights into the issues and controversies surrounding conflicts that have been raised in the trade literature. After the introduction, Section 2 outlines a conceptual framework for analyzing the antecedents and consequences of conflicts of interest encountered by professional service firms and discuss the role of safeguards in addressing threats of security breaches. Section 3 traces the evolution of the exclusivity norm in the U.S. and the split account system in Japan. Section 4 examines the use of safeguard and contractual provisions in limiting agency-client conflicts. Section 5 presents a typology of conflicts and policy guidelines issued by trade associations, followed by an analysis of a hybrid family of conflict policies that has emerged to accommodate the interests of holding companies and their large diversified, global corporate clients. The resolution of conflict disputes is also discussed. Section 6 reviews the limited body of analytical and empirical research available on the economics of conflict policies. Section 7 considers directions and opportunities for further research. Section 8 provides an overview of the current state of knowledge about alternative conflict policies followed in practice, the economic rationale underlying their use, and the effects conflict policy has on the industry's efficiency and organization.