Conflicts of interest do not thrive in sunlight. Just ask anyone in the advertising industry.

Whatever follows in the wake of the recent eye-opening study of transparency in the media business, one thing is already clear: big advertisers won’t be buying media the same way ever again.

The K2 Report uncovered the pervasive use of a variety of non-transparent business practices among major ad agencies, practices which create severe conflicts between the agencies’ best interests and those of their clients. Rebates from media suppliers were not disclosed to clients. Media buys were steered to suppliers that were partially owned by their holding companies. Media bought in bulk was subsequently resold to clients at huge, undisclosed markups. Essentially, media agencies created powerful incentives to purchase the media that was most profitable to the agency, without regard to whether that was the right thing for the client.

These are all classic conflicts of interest, and they tend to corrupt everything they touch. Endemic to service businesses, they wreak havoc on longstanding business relationships and can cost — as in the advertising industry — billions of dollars.

Transparency as an antidote

Conflicts of interest are everywhere, in every industry, and if they are not exposed to the light, they can infect any business relationship.

While a conflict of interest does not, in itself, signal an impropriety, most improprieties — as well as outright frauds — begin as conflicts. Wherever there are undisclosed incentives, wherever fiduciary decisions are influenced by gifts, rebates, personal favors, or sweetheart deals, the seeds of a conflict can take root.

There is no shortage of examples: The financial advisor who steers clients to bond funds that pay the largest commissions. The head of IT who recommends a supplier owned by a relative. The board chairman who builds his company’s new headquarters on property in which he is an investor.

None of these practices are improper per se, as long as they’re disclosed — as long as a client can say “Yes, I see the conflict, and I believe you will act in my interest regardless.” In each case, transparency makes all the difference. And in each case, non-transparency can lead to big trouble. Again, ask the advertising industry.

Same game, different field

While there are always new wrinkles on the rebate schemes and vendor arrangements chronicled in the media transparency report, the basic patterns are as old as civilization itself.

Those patterns are completely familiar to the report’s authors, K2 Intelligence, who have been exposing non-transparent business practices for over half a century. When hired by the Association of National Advertisers (ANA) to look into these practices, the firm knew little about the advertising business. But they knew, from long experience, about conflicts of interest.

Ever since the early sixties — when founder Jules Kroll saw his father’s printing business nearly ruined by the gouging practices of unscrupulous suppliers — Mr. Kroll and his successors have been shining sunlight on conflicts of interest in a wide range of industries, including financial services, real estate, construction, pharmaceuticals, retail, and many others. When they took on the ANA engagement, the only thing new was the industry.

Erosion of trust

In any conflict situation, trust is the first thing to go. The ANA had long heard from its members that media agency involvement in questionable practices was as widespread as it was costly. But persistent denials from the agencies and their holding companies had the effect of breaking down trust, a crucial element in agency-client relationships.

At the heart of this breakdown was the lack of understanding of the problem itself — its nature, its players, and its consequences. So the ANA asked K2 Intelligence to conduct an independent fact-finding study to diagnose the nature and extent of these potentially problematic practices and report them without fear or favor.

The firm set out to establish a broadly accepted set of facts that would shed light on the suspect practices, thereby laying the foundation upon which mutual trust could be rebuilt.

To that end, K2 Intelligence brought its formidable investigative skills — research, source interviews, collection and analysis of documentary evidence, and more — to bear on the tangled web of transparency issues it uncovered.

After eight months of meticulous work, the K2 report has already had a cleansing effect on advertisers, their agencies, their holding companies, and their media suppliers. Now that the facts are no longer in dispute, it is up to the industry itself to determine what actions should be taken to restore trust and re-normalize relationships.

For companies facing the same problems — regardless of industry — the K2 report underscores the critical importance of transparency. The idea is simple and clear: pour disinfecting sunlight on business relationships, before they turn toxic.