July 11 (Reuters) - Institutional Shareholder Services

(ISS) on Thursday said Enhabit ( EHAB ) shareholders should

elect three AREX Capital Management director candidates to the

nine member board, arguing the company needs more expertise in

home health, hospice and public company financial reporting.

The prominent proxy advisory firm, whose recommendations

often guide shareholder votes on proposed mergers and who serves

on a board, said AREX made a convincing case that new directors

are needed. But the hedge fund did not persuade ISS that a

majority of the two-year-old company's directors should be

ousted, the report reviewed by Reuters said.

AREX is asking investors to replace seven directors to help

reverse poor financial performance. It has also been pushing the

home health and hospice provider to put itself up for sale.

Investors will vote on July 25 unless the two sides reach an

agreement before the meeting date.

"The company's significant underperformance, both from a TSR

(total shareholder return) and operational standpoint, indicate

that a degree of change is needed at the board level," ISS

wrote. Enhabit's ( EHAB ) stock price has tumbled nearly 60% since it was

spun off of post-acute healthcare services provider Encompass

Health ( EHC ) in July 2022.

ISS recommended votes for AREX candidates Gregory Sheff, who

has home health operations experience, Anna-Gene O'Neal, who has

hospice experience, and Mark Ohlendorf, who has public company

chief financial officer experience.

AREX, which owns a 4.9% stake in Enhabit ( EHAB ), is backing Enhabit ( EHAB )

CEO Barbara Jacobsmeyer and director Barry Schochet for

reelection. Schochet joined the board last year when the company

reached an agreement with investors Cruiser Capital and Harbour

Point Capital Management in March 2023.

AREX told Enhabit ( EHAB ) last year that it wanted the company to

commit to immediately start a strategic review before the end of

2023. Enhabit ( EHAB ) in May said it decided to continue as an

independent, public company after having evaluated a range of

strategic options.

A company representative was not immediately available for

comment on the ISS recommendation and AREX declined to comment.