BEE partner accuses Y&R SA of fronting

2012-04-07 14:00

The fraught issue of fronting in the advertising industry has reared its head again.

This time, finger-pointing and counter-accusations over fronting have led to a breakdown of the relationship between global marketing and communications giant Y&R (originally Young & Rubicam) and its black economic empowerment (BEE) partner, Memeza QRX.

The tension between the two companies is so fractured that Memeza, previously led by former home affairs director-general Mavuso Msimang, has written a scathing letter to the department of trade and industry (DTI) in which it accused Y&R’s local subsidiary, Y&R SA, of fronting.

Other shareholders include prominent businessman Mthunzi Mdwaba and Peter Katuliiba.

In a letter dated February 8, ousted Memeza representative on Y&R SA’s board, Katuliiba, alleges that since 2006 Memeza has been insisting that Y&R fast-track transformation at the company, but its pleas have been falling on deaf ears.

However, Yossi Schwartz, current Y&R SA chairperson, said the relationship collapsed because Memeza was reluctant to do an empowerment audit.

Memeza sent the letter to Mvuzo Mthobile, a director for BEE investments and international relations at the DTI.

The bone of contention centres on Memeza’s pushing for the appointment of a black executive to head Y&R’s local operations, which would have set the marketing and communications firm on a course to meet its BEE targets.

Instead, Katuliiba alleges, white foreign expatriates were being flown in to run the show, completely disregarding Memeza’s wishes.

Attempts to escalate the matter to Y&R’s London-based parent, WPP, have yielded disappointment for Memeza. WPP owns 70% of Y&R SA, while Memeza owns 30%.

Memeza furthermore alleges that Mdwaba was removed as the chairperson of Y&R SA without a board resolution.

Y&R is not the first big company in the advertising sector – which saw its spend rising from R28.9 billion in 2010 to R32.1 billion last year, according to research firm Nielsen – to face accusations of fronting.

McCann Worldgroup SA recently hogged the headlines following a breakdown of its relationship with Africa Advertising & Communications.

“The reason Memeza has taken this long to take this drastic step of reporting the situation to the DTI is because we were somehow convinced that the kind of actions being taken at Y&R were out of ignorance, and that eventually WPP would come around and help us to sort out the rote.

“In the end, we even wrote a letter to the very top most person at WPP to help us rectify the situation. The response was that WPP had decided to look for an alternative partner,” wrote Katuliiba.

Katuliiba goes on to berate Y&R for coming up with “excuses” for failing to appoint a black chief executive.

“This was the start of our problems as our efforts were largely resisted by the company and WPP.

“We were always given all sorts of excuses for not doing the right things, excuses such as the old one that there are no black people who can do the work,” he wrote.

However, a letter written last June by Schwartz paints a different picture about the root cause of the dispute between the two partners.

Y&R says the dispute was sparked by its refusal to pay management fees to Memeza following a court order that froze its black partner’s bank accounts. Y&R refused to pay the fees to a new bank account, angering Memeza.

“We have requested on numerous occasions that your attorneys provide us with a legal opinion to confirm that our payment of management fees into the new bank account specified by Memeza will not constitute a breach of any court order,” wrote Schwartz.

According to Schwartz, the non-payment of the fees has angered Memeza to the point that it has decided to ruin Y&R’s South African business.

“Due to the non-payment of management fees, Memeza representatives on the board of Y&R SA have clearly taken a decision.

“This is to disrupt the business of Y&R SA to the maximum extent possible, presumably in the hope that this will prompt Y&R SA to pay the management fees, settle the Memeza action and ignore the court order,” he wrote.

He also accused Memeza of refusing to cooperate with Y&R SA’s rating agency in connection with the BEE audit until the management fees were paid. Schwartz said the failure to do the BEE audit resulted in Y&R failing to pitch for a contract from public broadcaster SABC.

This was after Memeza failed to show that it had distributed 240 shares of the company to black South African women as part of its broad-based empowerment strategy.

“It has come to our attention that neither the BEE rating agency nor Memeza could verify names or identification numbers of those women, resulting in failure to obtain level five on Y&R’s BEE certificate, which resulted in an inability to pitch for the SABC business.

“Again, this shows Memeza’s lack of professionalism and its determination to disrupt the business of Y&R SA and devalue its own investment in the process,” wrote Schwartz.

He added that Mdwaba had never been the company’s legitimate chairperson.

“Mdwaba has used the title of chairman of Y&R in correspondence and in representing himself within the business and to clients.

“In order to facilitate Memeza’s involvement and inclusion in the business, the Y&R SA board of directors permitted Mthunzi to refer to himself as chairman,” he said.

“However, there is no basis in law for this title and no legal rights attach to this title.

“Following his removal from the board of Y&R SA, we would remind him that he should not use this title or represent in any way that he has any authority to represent Y&R SA,” said Schwartz.

Meanwhile, the BEE Council this week met with President Jacob Zuma and one of the thorny issues discussed was continued fronting.

Speaking after the meeting, council member Sandile Zungu said fronting was tantamount to fraud.

“Fronting belittles black people to third-class citizens and strips them of their human dignity,” said Zungu.

He said the BEE draft bill would result in the setting up of a BEE commission, which will be authorised to receive fronting complaints and work with law enforcement agencies to prosecute culprits.

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