By Svea Herbst-Bayliss
(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 stock price has tumbled nearly 60% since it was spun off of post-acute healthcare services provider Encompass Health (NYSE: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 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 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 board and validated our case for meaningful boardroom change."
AREX, which owns a 4.9% stake in Enhabit, 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 last year it wanted the company to commit to immediately start a strategic review before the end of 2023. Enhabit in May decided to continue as an independent, public company after having evaluated a range of strategic options.