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The Fall & Rise of Omnicom

  • August 12, 2002, 12:00 AM EDT
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On the morning of June 12, after The Wall Street Journal's Page 1 probe of Omnicom Group hit the street, you could almost hear the gasp of an industry awakening to reports of the latest corporate-accounting scandal landing on its Madison Avenue doorstep. A battered sector looking for the faintest rays of recovery saw its hope blighted by suggestions of questionable accounting. Had Omnicom chief executive officer John Wren—widely seen as running the best-managed company in the business—stepped over the line?

Some competitors turned into vocal critics, all too eager to embrace the notion that, at last, there was an explanation for how Omnicom continually outperformed its competitors. (This is a company, after all, that had just reported its 43rd consecutive quarter of earnings growth in one of the worst operating environments since World War II.) Other corporate peers had a "There but for the grace of God" reaction and rooted for Wren to be vindicated.

Perhaps Wren's swagger and take-no-prisoners style made him a target for criticism. But, losing little time going on the offensive, those traits would serve him well. At 1:40 that afternoon, he and chief financial officer Randy Weisenburger hit the phones, gathering analysts on a conference call to defend Omnicom's reputation. Wren sounded calm but indignant as he referred to the WSJ story's "numerous inaccuracies and some improper innuendos, particularly with respect to the way in which the company is managed and governed, and its growth strategy."

Furthermore, Wren addressed the resignation of outside board member Robert Callander, who left after a dispute over the formation of Seneca Invest ments LLC, the off-balance-sheet joint venture in which Omnicom housed its Internet assets. Cal lan der's departure had sparked the WSJ story, leading to the crisis of confidence among Omnicom investors.

Despite Wren's reassurances, panicked investors fled, sending Omnicom's stock plummeting 12.3 percent that day to close at $62.28. Vulturous short sellers descended on the shares. By June 27, the stock would sink to $36.50, down a whopping 62.5 percent from the company's 52-week high of $97.35 on March 4.

That first day would be the last time Wren would make a public denial of the WSJ's accusations. Wren and Weis en burger chose to take Omni com's case directly to industry analysts and institutional investors. They also logged long hours with KPMG, the company's new auditors, named on June 13 to replace longtime accountants Arthur Andersen. Wren and his hand-picked financial partner of three years hung tough in the face of Omnicom's unprecedented stock volatility.

"I'm in a marathon," Wren told friends. It was a race he was determined to win, but its grueling course took a toll. During those first few weeks, friends and colleagues described Wren as "deflated." They talked about needing to see the bravado that gave them confidence in his leadership. This summer marked Wren's 50th birthday, a milestone typically met with introspection. For Wren, the occasion was marked not only by his struggle with the greatest challenge of his career, but by a deeply felt personal sadness. Just after the WSJ story appeared, his mother—whom he has described as the major influence on his life—died. Not long after, his father became seriously ill. "He's aged 10 years before my eyes," notes a friend. "He's thin, gray and not standing straight—that's nothing like John."

And certainly nothing like the industry CEO who, as recently as May, could do no wrong, coming off a first-quarter 35 percent leap in earnings on an 8.2 percent increase in revenue. In the second-quarter financials, released last week, earnings-per-share came in on target, rising 10 percent to $1. Revenue rose 9.7 percent to $1.92 billion from $1.75 billion a year earlier. IPG, in contrast, is expected to report 39 cents a share and WPP $1.10 a share, according to analysts' consensus from Thomson Financial First Call.

More important, last week's announcement also included the news that KPMG had given Omnicom a clean bill of health on Seneca and that Wren and Weisenburger would have no problem signing off on Omnicom's auditing by Aug. 14. They must do so per new Securities and Exchange Commission regulations requiring top managers to take responsibility for their numbers' veracity. Both men declined comment for this story.

Until the WSJ story, Wren's characteristically optimistic outlook had been a byproduct of Omnicom's fiscal success. His performance has been widely acclaimed, even by competitors. He has been lauded for building a company that derives more than half its revenue from below-the-line services while also owning the top creative brands in traditional advertising. His deal-making prowess has more lately extended to clients—in November 2000 he was instrumental in landing Omnicom the $2 billion Daimler Chrysler business. But in the current environment of "guilty until proven innocent," little of that mattered after the WSJ hinted at impropriety.

There was plenty of bad news to play into the hands of short sellers. Shareholder class-action suits mounted. Services such as Moody's and Standard & Poor's began reviewing the company's investment-grade credit ratings. With KPMG's auditors scrutinizing the books, industry whispers suggested there would be other shoes to drop.

Omnicom's buzz never reached the level of this summer's many poster children for corporate malfeasance. No, "Wren-ron" wasn't quite top of mind as the feds started to get the goods on Tyco, WorldCom, Xerox and Qwest.

And now it looks as though it never deserved to be.

In fact, it now seems that Callander's questions regarding Seneca, which originally looked like they could take Omnicom down a WorldCom-like path, arose more from a clash of personalities than suspect accounting practices. Callander, after all, was the audit committee head who endorsed the assessment of Omnicom's accounting practices by then-auditor Andersen in a recent meeting, sources said. Callander said Andersen described Omni com as conservative in its accounting practices.

In a business built on personal relationships, it's an incredible irony that the failure of Omnicom to privately address one board member's grievances could end up threatening to take down the house that Wren built.

After the disclosure of Callander's departure, it surfaced that another outside director, Richard Beattie, chairman of New York law firm Simpson Thacher & Bartlett, had quietly quit the board in January. Amid published reports that he shared some of Cal lander's concerns about Omnicom's accounting practices, Beattie rushed out a statement explaining that he left because of other demands on his time.

Former board members describe Callander as an old-school banker, and he seemed to relish his traditional ways. A former executive-in-residence at the Columbia Business School, Callander has an article posted on the school's career Web site that demonstrates his respect for corporate good behavior. He advises students to ask questions and listen to the answers. He further says, "Focus on the people below you. It is they who can make or break you." In a prescient tone, the article closes, "This advice will not guarantee success, but it may help you avoid self-destructing."

Callander, 72, is a retired vice chairman at Chemical Bank who joined Omnicom's board a decade ago. He is a one-time managing director of the Metropolitan Opera, where he met Omnicom chairman Bruce Crawford, the opera's general manager from 1985-89. Callander is known as a Crawford loyalist (he has not returned any of Crawford's recent phone calls, however). At the time of Cal lander's resignation from Omnicom, sources suggested he was angry with management over the prospect of losing his chairmanship of the audit committee in a routine shift of positions that is to be made in September. Callander is said to have particularly chafed at the operating style of Weisenburger, a 43-year-old Whar ton MBA who graduated at the top of his class and enjoyed a fast-track Wall Street career at places like Wasserstein Perella before moving to Omnicom in January 1999.

Callander did not return repeated calls seeking comment.

"Randy put [Seneca] together, and it's a smart, good deal, but Callander couldn't understand it," recalls one former board member. Another source elaborates: "Randy is scary smart, and, like a lot of really smart people, he doesn't have much time for people who aren't as smart. I think Randy didn't like [Callander] and was very arrogant with him. Seneca was the sword he fell on, but tensions go way back."

At the May 21 board meeting, Callander questioned whether Seneca's creation was authorized by the board. The discussion followed Weisenburger's recommendation that the holding company buy interactive shops Organic and Agency.com from Seneca. These acquisitions had always been a possibility, so long as Omnicom's joint-venture partner in Seneca, Pegasus Partners II—a Green wich, Conn.-based investment firm that specializes in shoring up distressed assets—could clean up the two companies enough to make them financially viable. (See sidebar.)

At Callander's request, in-house counsel Barry Wagner searched for the term "Seneca" in a list of authorized transactions. But when the word failed to come up, Wagner incorrectly concluded the deal had not been approved. It had, in fact, been authorized under the name E-Services Transactions at a March 29, 2001, board meeting. It was only two months later that the corporation's name was changed to Seneca.

"So Mr. Callander wasn't wrong when he asked the question," Wren explained in the June 12 analyst conference call. "But he got bad information." Wren said that Callander "was very upset" when Wagner came to the conclusion that Seneca was not authorized.

The company's board agreed to have the Seneca transaction reviewed by both the audit committee and a newly formed finance committee before considering a purchase of Organic and Agency.com. It remains unclear why Callander felt the board was in the dark about Seneca. But the general tenor of the May 21 meeting suggests that friction between him and several other board members had grown to the extent that even the smallest slight could cause fireworks. By the next morning, Callander had resigned.

His one-sentence resignation letter sheds no light on his departure. How could a board member who headed the audit committee not have remembered whether the deal to create Seneca had been authorized? The steps that led to the formation of Seneca and then to the labor-intensive process of folding in Omnicom's online stakes were disclosed in a series of documents filed with the Securities and Exchange Commission during the course of at least nine months.

People familiar with Seneca say the Omnicom board's briefings on Seneca would make it just about impossible to brush aside authorization. One source says Seneca was frequently discussed by the board because of the unusual nature of the deal.

Paul Hodgson, a senior research associate at The Corporate Library, a corporate-governance research organization, offers a possible explanation. He says Callander may have been so overloaded with corporate directorships that it became difficult to keep up with each company's activities. The Library's records show that Callander serves on at least five corporate boards: food concessionaire Aramark and at least four different funds managed by Deutsche Investment Management Americas. "If he's putting in the time on each of these boards in the way that's expected," says Hodgson, "it's difficult for him to meet performance standards on any of them."

The problem, he explains, isn't attendance—the SEC sets a 75 percent meeting-attendance standard, and Callander passes the test. It has more to do with workload. Hodgson notes that at Aramark alone, Callander serves on four committees.

Despite Omnicom's absolution by KPMG, the damage has not been completely undone. The WSJ is sticking to its original assertions. "We completely stand by our story," says WSJ representative Richard Goldstein.

"Omnicom is a victim of the current milieu, not the perpetrator," argues a former company board member.

Still, Wren is working to regain his company's stature. "He's cranking a lot of hours," said a source. "He won't stop till he makes this right."