The truth behind the Dentsu scandals

Updated : 07.11.2016 / Category Economy

20161107083016-959fd699c116f3485c6601cee4585083f4222e5d.jpg

A company's true nature is often revealed by the way it handles trouble.

Since late September, a number of scandals have arisen at Dentsu Inc., Japan's leading advertising agency, including the overcharging of clients for digital advertising services and a ruling by a Tokyo labor standards inspection office that recognized a former Dentsu employee's suicide as "death from overwork." One of the firm's employees, meanwhile, described the company's handling of such affairs as "among the worst."

Dentsu workers often patronizingly lecture client firms about marketing and other matters, but when faced with its own problems, Dentsu itself is fundamentally ill-prepared.

"Our company is always on the offensive, so we're not used to be attacked," said a Dentsu employee in his 50s. "In particular, we didn't expect such a high level of criticism over the suicide issue; our weaknesses have been exposed."

With a market share of 25 percent, Dentsu has no real rivals in the domestic advertising market, but internally, and perhaps unexpectedly, the company is fragile.

Globalization making company 'flabby'
The company is ostensibly dealing with the problems in an expeditious manner. In response to the suicide-related problem, it issued a written notice to the entire firm on Oct. 17 regarding "changes to the implementation of work management," signed by the personnel bureau chief. As to an agreement on overtime between the company and the labor union—under Article 36 of the Labor Standards Law—the document denotes a reduction in overtime from a non-statutory 50 hours per month, to 45 hours per month from Nov. 1.

In addition, the firm will reportedly ban, in principle, office-based work after 10 p.m. At the Dentsu headquarters building in Shiodome, Tokyo, the lights on all office floors are turned off on the hour, starting at 7 p.m. Though this measure is to prevent lights being left on unnecessarily, it also serves as a "message not to work overtime," according to a Dentsu insider. However, even though the lights are turned off, they are turned back on again by employees.

"I don't know whether the measure will work," said a Dentsu salesman in his 40s. "The corporate culture regards employees who work late at night as full-fledged workers; that mind-set won't change so easily. If the company implements superficial measures, the reality is that things will likely stay the same."

The firm has failed to tackle similar problems in the past. Three years ago, another former Dentsu official was recognized as having died from overwork, and last summer it came to light that a local labor standard inspection office issued guidance after conducting on-site inspections at the firm.

On each occasion, Dentsu should have taken measures to improve the situation, but—similar to many other employees—the aforementioned salesman said he does not remember anything being done. As such, any measures taken were obviously a pretense to please the labor standard inspection office.

"Blame for the suicide incident and the overcharging of digital advertising services shouldn't be laid solely at the feet of supervisors and individual employees with positions of responsibility," said a middle-ranking Dentsu employee in his 40s. "All of a sudden, distortions created by the entire company over the last five years were exposed."

The last five years refer to the period that incumbent President Tadashi Ishii has been in office. Having assumed the post shortly after the 2011 East Japan Earthquake, Ishii has placed top priority on two pillars: digitalization and globalization.

To swiftly achieve these goals, Ishii purchased overseas online advertisement-related firms. His acquisitions began immediately after taking office and the biggest turning point came when Dentsu purchased major British advertising agency Aegis Group plc in 2012 for about ¥400 billion (based on the exchange rate at that time). This led to the creation of the Dentsu Aegis Network, which now underpins Dentsu's overseas business.

Today, Dentsu Aegis takes the initiative in the group's purchase of overseas companies. "The firm took the lead in the purchase of Merkle, a U.S. data marketing firm, in August this year," said the Dentsu employee in his 40s.

Back in 2011, Dentsu's nondomestic business accounted for less than 20 percent of its consolidated financial income. As that time, the company simply supported Japanese firms' overseas advertising and marketing activities, acting merely as an extension of its domestic business. But that situation has changed dramatically over the past five years.

The company changed its settlement of accounts to end in December instead of March for the previous fiscal year ending in December 2015, so it is difficult to simply compare overseas and domestic sales. Yet, its overseas business accounted for more than 50 percent of its total profits—about ¥706 billion (as calculated in accordance with the international accounting standards).

"The company projects that this figure will rise to about 55 percent," said the same Dentsu insider. Seemingly, the firm is succeeding in the globalization of its business.

Yet, therein lies the pitfall—the more the firm notches up overseas sales, the lower its operating margins become. In the previous fiscal year, the company's domestic business posted gross profit of ¥255.7 billion (between April and December 2015), whereas operating profit stood at ¥63.3 billion on an adjusted basis, yielding an operating margin of 24.8 percent.

On the other hand, its overseas business marked gross profit of ¥414.1 billion (between January and December 2015) while operating profit was only ¥70.2 billion, meaning its overseas operating margin was about 8 percentage points lower than that of its domestic business.

"Dentsu's overseas business is unprofitable because its main sources of revenue are online ads," the Dentsu source said.

This is an ongoing problem faced by both domestic and overseas ad agencies. Compared with commercials and advertisements for TV, radio, newspapers and magazines, which Dentsu refers to as the "four mass media," online ads generate less income. Nevertheless, ad agencies have to stay in close touch with clients and publishers on a daily basis. Unlike conventional mass media ads—where an ad agency's work is complete once an ad spot or space has been secured and the ad has been aired or printed—digital advertising requires great care and time. Gross profit in the field of online ads accounts for 34 percent of Dentsu's total gross profit, but this figure rises to 45 percent for its overseas operations.

"Acquiring overseas subsidiaries helped expand Dentsu's overseas business, but the firm is effectively getting 'flabby,'" according to one of the Dentsu insiders.

If the company held the dominant share in an overseas market, as it does back home, it might be able to control the market by offering discounts to clients; the firm is in fact "a mid-ranking ad agency, ranked fifth in the global market," said the aforementioned Dentsu employee in his 40s.

Online ad divisions suffering chronic manpower shortage
The expansion of online ads is also damaging Dentsu's domestic business. Unconsolidated sales between April and December 2015 (as calculated in accordance with Japanese accounting standards) saw digital advertising sales grow to ¥62.3 billion, approaching the firm's newspaper ad sales of ¥65.6 billion.

"[Digital advertising sales are] expected to surpass those of newspaper ads in the current business year," said the Dentsu insider.

However, Dentsu has failed to establish a sufficient system to cope with the situation.

"Since about a decade ago, when online ads began expanding, our company has been unable to train and allocate enough fresh college graduates [to the new field]," said the aforementioned employee in his 50s. "As a result, it has come to rely on outside staff, and relevant divisions in the company became somewhat difficult to understand or control."

Dentsu is ranked highly among job-seeking university students, and has stressed that it wants to recruit students who majored in science. "President Ishii has issued orders to hire a large number of science-major students," said the employee in his 50s. But the firm has failed to realize its goal, and the majority of employees still have liberal arts backgrounds.

Dentsu used to have an unwritten rule wherein new employees were placed in sections that dealt with the mass media, but recently it has been assigning many new employees to online ad divisions.

"Last year, of more than 100 new employees, about 60 were assigned to online ad divisions," the same Dentsu employee said. Coincidentally, Matsuri Takahashi, a former Dentsu employee who jumped to her death from a company dormitory on Christmas Day last year, was among those who worked in the online ad divisions. The labor standard inspection office recently ruled her suicide was due to death by overwork.

As data shows, online ads generate low profits. This holds true for Dentsu's domestic business, too.

"While workers in charge of TV and newspapers deal with business worth tens of millions of yen, those in the online ad divisions oversee projects often worth less than ¥1 million each," said the Dentsu employee in his 40s.

In the case of programmatic advertising in which the number of listings and ad fees fluctuate by the second, "ad management results come out each evening, so employees have to make adjustments about how to place ads starting the next day, and they constantly receive requests from clients," said the Dentsu insider, adding that online ad divisions remain a "doomed working environment," swamped with day-to-day clerical work, no matter how many new workers are assigned.

Concerning Takahashi's suicide, her supervisor has been blamed for putting her under pressure. Yet, some Dentsu workers still speak up for him. "He was probably under a lot of work-related pressure, too, and couldn't afford to take care of her," the employee in his 40s said.

Post-Olympics fate
Dentsu's working environment apparently led to the overcharging scandal and the suicide of the young female employee. While sales from the four major conventional media either remain stagnant or are in gradual decline, sales from digital advertising continue to mark two-digit growth. But Dentsu employees are reluctant about working in the digital advertising divisions, according to the same Dentsu employee. President Ishii's strategy to strengthen the firm's digital businesses has evolved into a war of attrition.

There is no prospect of resolving the company's chronic manpower shortage. On Oct. 18, Dentsu's personnel bureau sent a notice to employees over 50 regarding its special early-retirement incentive program. Currently, the company is soliciting workers to take early retirement, but has banned their re-employment at Dentsu subsidiaries and other group companies. The October notice, however, said that the company would alter this policy and allow them to be rehired at group companies through the end of the 2020 Tokyo Olympics and Paralympics. The notice says early retirees can only be hired at "group firms authorized by the company," but that all applicants would be rehired, in principle. This indicates that the manpower shortage at the firm has reached a critical juncture.

In light of such circumstances, the firm's calls for improvements in the working environment have a hollow ring. One of the Dentsu insiders predicted that the situation could worsen further, saying, "Employees aren't allowed to do overtime, so they'll take unfinished work home with them, thus burdening their private lives."

Dentsu is currently enjoying a strong tailwind in the run-up toward the 2020 Tokyo Olympics. The firm monopolizes marketing for the Games and is set to reap large benefits. However, the company's post-Olympics survival is a real problem.

"Ads for newspapers and TV will significantly decline, so unless we greatly boost the profitability of digital advertising, the company's management may be affected," said the Dentsu employee in his 50s.

Dentsu's recent series of problems present a good opportunity to implement reforms, but so far it has only introduced stopgap measures. The firm is calling on its employees to abide by the new overtime agreement and "telling them not to tweet or post messages on social media sites about overtime hours," according to the same Dentsu insider.

As such, the advertising giant's corporate culture is unlikely to change, and further scandals will likely continue to trouble the firm.

---------------------------------------------------


This is a translation of an article from the November 2016 issue of Sentaku. The original article can be found here.