June 30, 2009 / 12:23 PM / 8 years ago

ANALYSIS - Towers-Watson deal rankles governance activists

WASHINGTON (Reuters) - Corporate governance activists decried a merger of Watson Wyatt Worldwide Inc and Towers Perrin, saying conflicts of interests could arise if executive compensation consultants get hired by the same managers to advise them on human resources issues.

The merger, announced late on Sunday, comes as Washington policymakers grapple with how to rein in executive pay and improve disclosures about the relatively small number of compensation consulting firms used by big U.S. companies.

Treasury Secretary Timothy Geithner has urged Congress to give the Securities and Exchange Commission power to require all publicly-traded companies to let shareholders cast a nonbinding vote on pay packages and to ensure that board compensation committees have more independence from management.

The potential for conflicts of interests was highlighted in a 2007 Congressional report that said consultants hired by boards to help set executive pay are also sometimes hired by the same executives to help run company pension plans or advise on human resources issues.

"This reduces the number of available consultancy firms not just for compensation consulting, but for actuarial and investment consulting for pension funds, and limits the number of large (consultancy firms) that can advise companies on compensation and employee benefits," said Vineeta Anand, a spokeswoman for the largest U.S. labor federation, the AFL-CIO.

"We are concerned about the kind of advice that companies will get and the implications for investors."

The human resources consulting market is splintered, with Mercer, a subsidiary of Marsh & McLennan Companies Inc, with 13 percent of the market, Accenture Ltd and Watson Wyatt at 7 percent each and Towers Perrin Forster & Crosby at 5 percent, according to a research note by UBS Securities LLC issued on Monday that cited 2006 figures.

Watson Wyatt, Towers Perrin , Mercer and Hewitt Associates Inc are known among corporate governance experts as the four firms that deal with executive compensation issues. They also advise corporations on employee healthcare and retirement plans.

"We want to break the link between consulting for executive pay and other human resources issues," said Richard Ferlauto, director of pension and benefit policy at labor group the American Federation of State, County and Municipal Employees.

The two unions are among shareholder activists who have urged the federal government to get more involved in overseeing the multimillion-dollar pay packages received by a growing number of American chief executives.

The SEC is due to meet on Wednesday to consider proposals to give shareholders more say on executive pay and may require companies to disclose more information on how they compensate executives.

In its massive economic stimulus package early this year, Congress ordered the U.S. Treasury Department to restrict bonuses and other forms of executive pay at banks accepting taxpayer bailouts. The Obama administration said earlier this month it wants compensation practices at all companies "better aligned" with long-term value and prudent risk management.

No Antitrust Concerns

On Sunday, Watson Wyatt and Towers Perrin announced plans for a $3.5 billion all-stock deal that would create the biggest human resources consultancy, according to analysts at Stifel Nicolaus.

The firms said it would take three years to "achieve savings of $80 million" through job cuts and streamlining overlapping operations -- a sign of how deep the recession has run, experts said.

While corporate governance activists may oppose the deal, it is unlikely to face any antitrust roadblocks, according to antitrust experts.

Evan Stewart, with Zuckerman Spaeder, said barriers to entering the corporate consulting industry were low.

"This one doesn't have antitrust issues," he said.

Corporate boards in the past used consultants as an "insurance policy" to justify fat paychecks for chief executives, Stewart said.

But "with all the publicity and all the changes going on with executive compensation, this game can't be played as overtly as in the past," he added.

An investigation by Democratic staff on the House Oversight Committee found that, in 2006, more than 100 large companies hired compensation consultants with conflicts of interest.

Then committee chairman Henry Waxman said the report raised a basic question about whether corporate compensation was a result of a rigged process or earned.

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