Are Agency Execs on Startup Boards Conflicted?

The worlds of venture capital, startups and agencies overlap necessarily. The companies in the tech industry that want to reshape media need expertise agencies have about the sector. They also need the budgets agencies control.

It has become a fairly common practice over the years for agency executives to parlay their positions into advisory board roles, formal and informal, with startups. This can mean nothing more than advice on the market over regular dinners. But it can also mean formal arrangements that involve equity in the startup.

The practice raises an important question: Is it appropriate for an agency executive controlling ad budgets to have a financial interest in companies selling or facilitating the sale of ads or related services? In theory there’s the clear potential for conflicts of interest to arise. An agency executive could, for example, give preference to technology or services from a company she has a stake in, and ultimately benefit personally from their clients’ budgets.

The truth of the matter is, throughout the agency system, access is often traded for favors. Digiday has detailed the small-bore favors of the lower rungs — drinks, summer house trips, free sunglasses and jeans — but higher-up execs enjoy perks from the companies that want access to them, too.

Digiday spoke with numerous agency executives with equity in ad-related companies for this story, few of which were willing to go on-the-record with their comments. That in itself speaks volumes about the sensitivity around the subject. Some executives, speaking on background, freely admitted the practice of sitting on boards with compensation creates, at the very least, a bad appearance. Others hold this isn’t much of a problem so long as it is transparent.

“As an agency staffer with a financial position there’s absolutely the opportunity to channel budget. That’s where the problem arises,” said one agency executive that holds a financial interest in multiple startups, and asked to remain anonymous. “There should be some guards against around having a decision maker being the same person that has an investment.”

Others believe there’s a simple perception issue. After all, an agency is hired to be an unbiased agent and steward of a client’s budget. It’s hard to square that with the idea that the agent could also have a position in one of the companies in a transaction.

“I think it’s a conflict of interest and sends a bad message to clients to allow some or any employees from having interests of any degree with companies in the ad market, even though I have happily participated in it,” said another. “But even though I’ve been thoroughly ethical and responsible, it’s impossible to supervise others’ activities, so it has to be all or nothing.”

Patrick Moorhead, a svp at Draftfcb who is on advisory boards for ad-related companies, was one of the few who also said the potential for conflicts is evident. “It raises questions. Did a company raise business on the merits of their solution, or a back-room deal? I’m not thrilled by the idea of this going on, but I imagine it does.”

The issue is important at a time when the advertising technology industry itself is in flux. By some measures it has raised $4 billion over the past few years. One look at the famed Luma slide will tell you there are many companies trying to succeed in similar sectors. These companies are motivated to do what they can to get an in at agencies.

There are numerous other examples of these potential conflicts across online advertising. Vivaki’s chief strategy and innovation officer Rishad Tobaccowala is associated with a range of online ad-related companies including MarketShare, BrightTag, My Likes, and Visible Measures. Ogilvy & Mather’s chief digital officer Brandon Berger sits on advisory boards for digital media companies such as Tap.me, GraphEffect, Adapt.ly, Legolas Media, and others. Ian Schafer, CEO of digital agency Deep Focus recently joined the board of Solve Media. Those are just three examples, picked at random, but it’s common for agency staff to be paid with equity for their advice.

But is this type of financial interest really an issue? Are buying decisions ever really being made on the basis of equity positions, and are the equity positions significant enough to matter? According to Moorhead, as long as any relationships are entirely transparent it needn’t be a problem.

“I always have express written permission from the agency,” he said, in reference to his own advisory roles. “I’m also very clear that I cannot recommend startups I advise for pole position or RFPs or partnerships. If they’re working with the agency I’ll recuse myself, it’s not good form to have a vested financial interest.”

But even if an agency buyer was funneling money into a startup he or she had an interest in, the impact on the long-term success of the company would be minimal, said Jason Krebs, chief media officer at online video ad network Tremor Video. “The startups really are doing it for the expertise, and for the legitimacy the names add to what they’re doing. It doesn’t give them a leg-up.”

The involvement of a senior ad exec or two is hardly going to hurt a startup’s chances of getting through agency doors, though, as alluded to by Moorhead. Even so, that kind of approach is hardly a sustainable strategy, Krebs added. “Even if they are getting money funneled to them, it can only get them so far. It’s not going to make or break a company.”

But the advantage it gives them is more subtle. The reason many of these startups offer advisory board positions to agency figures is because it helps validate their offerings. (It is also the reason you see vendors make hires of high-ranking agency personnel, with the thinking these executives will bring with them entree to budgets.) The fact of the matter is that agency buyers are more likely to meet with companies with high-profile names tied to them and, most likely, the companies tied to people in their organizations. The startups get their money’s worth.

Another key question is how much agencies know, or care, about the advisory activity of their staff. They have rules in place to monitor and track their advisory arrangements, but the extent to which they enforce them is another matter. They also have policies around the types of gifts and corporate entertainment their staffers are allowed to accept, but those are regularly ignored.

So perhaps to a certain extent they turn a blind eye to their execs activity, too. Just as the salaries of junior media buyers are propped up by perks and gifts donated by vendors and ad sellers, advisory roles could be seen as a way to make compensation in the agency business more comparable with that of other industries.

“The leadership at these organizations understands this is a part of the compensation,” said Zach Coelius, CEO of demand-side platform Triggit. “It’s no different to hanging out on yachts and going to parties.