* Company faced proposal on CEO/Chairman split at annual meeting * Activist investor has challenged company, nominated directors * Shareholders to vote on new board at May 16 meeting By Michael Erman and Swetha Gopinath May 10 (Reuters) - John Hess is being stripped of his chairman duties at Hess Corp, as the oil and gas company scrambles to avoid an embarrassing defeat by an activist investor. Hess Corp said on Friday that it will separate the roles of chairman and chief executive immediately following its annual meeting next week. John Hess -- the son of Hess Corp founder Leon Hess -- has held both roles since 1995. He will remain CEO and a director at the company. In addition to the slate of board nominees backed by hedge fund Elliott Management, shareholders were also set to vote on a proposal to break up the two positions at next week's annual meeting. Hess had recommended shareholders vote against the split. "We understand our shareholders` views, and recognize that our corporate governance structure should have been improved sooner," John Mullin, Hess`s lead director said in a statement. "Separating the roles of Chairman and CEO and declassifying our Board reflects our commitment to shareholders." Elliott Management, which owns a 4.5 percent stake in Hess, has been clamoring for change at the company since January, when it launched its campaign to seat the new directors and pitched a plan to break up the company. The hedge fund has railed against the current board, alleging that directors are too closely tied to Hess Chief Executive John Hess and that poor oversight has led to underperformance. Elliott said in a statement that it didn't view the move as a concession by Hess. "A resolution to split the Chairman & CEO roles at Hess is on this year's proxy," the hedge fund said. "It is significant to note that Hess's Board recommended against this split only a few weeks ago." BOARD VOTE As the company has mounted its defense against Elliott's arguments, Hess has announced plans to exit its retail gasoline, marketing and trading businesses and assembled its own slate of new independent directors for its board. Shareholders will vote on whether to seat the Hess nominees or Elliott's slate on May 16. Should Hess prevail, it plans to appoint former General Electric executive John Krenicki, to head its board. The company said that John Hess supported the decision to break up the CEO and chairman roles. Analysts said pressure from investors had accelerated the company's long-term plan to focus on exploration and production. Proxy advisory firms ISS and Glass Lewis have recommended that Hess shareholders elect the board members nominated by Elliott Management. Another advisory firm, Egan Jones, has backed Hess's nominees. "Regardless of whether Elliott wins the bid for their proposed board seats, Hess has become more Street-friendly in the midst of the proxy fight," analysts at investment bank Tudor, Pickering, Holt & Co said. Also on Friday, Hess said it would start a "board renewal process" through which the majority of the board would comprise new directors by the end of 2013, in addition to the six new directors slated for election at the May 16 annual meeting. Another U.S. oil company, Occidental Petroleum Corp, bowed to shareholder pressure last month and changed its policies to prevent former CEOs from serving on the board. Through Thursday's close, Hess's shares have gained 13.6 percent since the company's disclosure on Jan. 29 that Elliott was trying to break up the company. Its shares fell 1.7 percent to $69.57 on Friday morning on the New York Stock Exchange.