Towers-Watson deal rankles governance activists

By Rachelle Younglai and Diane Bartz - Analysis

WASHINGTON (Reuters) - Corporate governance activists decried a merger of Watson Wyatt Worldwide Inc (WW.N: Quote, Profile, Research) 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 (MMC.N: Quote, Profile, Research), with 13 percent of the market, Accenture Ltd (ACN.N: Quote, Profile, Research) 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 (HEW.N: Quote, Profile, Research) 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.