July 11 (Reuters) - Institutional Shareholder Services

(ISS) said on Thursday Enhabit shareholders should

elect three AREX Capital Management director candidates to the

nine-member board, saying 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, according

to the report reviewed by Reuters.

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 a 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. The stock climbed 2.7% to close

trading at $9.48 on Friday.

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.

ISS also wrote that a more limited number of new directors

could provide "effective oversight of management without

implementing drastic changes that could jeopardize what appear

to be the early signs of a turnaround."

Enhabit ( EHAB ) on Friday urged stockholders to vote for all its

nine nominees, adding that it disagrees with ISS's

recommendation as critical experience would be lost by replacing

the directors.

"We are pleased that ISS recognizes our performance over the

last two quarters and agrees with the company that

shifting course now and handing control of the board to AREX

is not in the best interests of the company's stockholders,"

Enhabit ( EHAB ) said in a statement.

AREX said it is "pleased that a leading independent proxy

advisory firm has recognized the lack of home health and hospice

industry expertise on Enhabit's ( EHAB ) board and validated our case for

meaningful boardroom change."

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

Barbara Jacobsmeyer and director Barry Schochet for re-election.

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 it wanted the company to commit

to immediately start a strategic review before the end of 2023.

Enhabit ( EHAB ) in May decided to continue as an independent, public

company after having evaluated a range of strategic options.

(Reporting by Svea Herbst-Bayliss and Pratik Jain; Editing by

Christian Schmollinger, Will Dunham and Arun Koyyur)