(Recasts with second proxy firm's recommendation)
By Svea Herbst-Bayliss
BOSTON, April 24 Two prominent proxy advisory firms on Thursday split their recommendations on how investors should vote in a battle between auction house Sotheby's and activist investor Daniel Loeb.
Institutional Shareholder Services backed two of Loeb's candidates while Glass Lewis & Company recommended that shareholders vote for the company's candidates.
The reports will give each side fresh support as they try to sway other shareholders before the May 6 annual meeting.
Loeb, whose $14.5 billion hedge fund Third Point is Sotheby's biggest investor, has been pushing the auction house to cut costs and become more competitive for months and last year compared the company to "an Old Master painting in desperate need of restoration."
ISS recommended that shareholders vote for Loeb, an avid art collector, and Olivier Reza, a former investment banker who runs a private French jewelry company, and said: "It appears that introducing some change into the boardroom is warranted."
Glass Lewis wrote that the dissidents have identified areas of concern, but fell short of "making a compelling case that additional changes in the boardroom are warranted at this time beyond those already implemented by the Company."
The proxy fight has become one of Wall Street's most-watched battles, pitting one of the industry's best-known activist investors against the 270-year old auction house.
The company's share price rose 4.31 percent to $42.40 on Thursday. It has fallen 20 percent since the start of the year.
Late on Wednesday, Sotheby's preannounced better earnings, saying its first-quarter pretax loss had shrunk to $6 million, from a $32 million loss a year ago.
ISS said Sotheby's revenue growth has not been consistent and noted more total operating expenses have been added back in than the $185 million cut by the company four years ago.
Even though the dissidents' strategic critique is not as fully developed as shareholders might want, ISS said "it has more meat on the bone than the vague notion the company has offered." ISS said Reza would bring particularly useful experience to the board given that he uses firms like Sotheby's to consign and buy jewels for Reza Gem.
Glass Lewis said Sotheby's has been responsive to shareholders' concerns by returning capital to investors and adding more independent directors.
Sotheby's urged investors to vote its slate saying now is not the time to "diverge from Sotheby's leadership."
"Mr. Loeb's lack of a substantive plan, his erratic and disruptive actions at Sotheby's, and his short tenure serving on other public company boards (less than two years) raise doubts about whether Mr. Loeb will put the interests of ALL Sotheby's shareholders ahead of his own," the company said.
It previously offered Loeb a seat on the board.
Loeb said: "To dismiss ISS's well-reasoned, respected analysis out-of-hand either shows that this Board is in complete denial or demonstrates a cognitive dissonance which alone should convince shareholders to support Third Point's nominees."
If Loeb were to win, it would mark his first return to a corporate boardroom after sitting on Yahoo's board, where he handpicked a new chief executive officer, which helped push up the company's share price.
He left Yahoo's board last year along with Harry Wilson, a restructuring expert who is also on Third Point's Sotheby's slate. ISS did not recommend voting for Wilson.
Now each side will try to win support from uncommitted or undecided investors including BlackRock, which owns 8 percent of the company, and Vanguard, which owns 5.9 percent. Hedge fund Marcato Capital Management owns 6.6 percent of the company and has also pressed for change. (Reporting by Svea Herbst-Bayliss; Editing by Lisa Von Ahn, Meredith Mazzilli and Gunna Dickson)