REFILE-UPDATE 3-ISS endorses activist Peltz for Disney board in bitter proxy fight

(In paragraph 3, corrects spelling of Laurene Powell Jobs name.)

By Svea Herbst-Bayliss and Dawn Chmielewski

NEW YORK, March 21 (Reuters) - In a blow to Walt Disney , activist Nelson Peltz received a powerful endorsement in his battle against the entertainment conglomerate on Thursday, when proxy advisory firm Institutional Shareholder Services (ISS) recommended shareholders elect him to the board.

ISS, whose recommendations can sway hundreds of investors' votes, said Peltz, a large Disney shareholder, could ensure the board does its job well as it tackles questions of CEO succession and strategy at the home of Mickey Mouse. The recommendation comes as Disney CEO Bob Iger continues to rally support among a high profile cast that included Emerson Collective founder and president Laurene Powell Jobs on Thursday and Star Wars-creator George Lucas earlier this week.

"Dissident nominee Peltz, as a significant shareholder, could be additive to the succession process, providing assurance to other investors that the board is properly engaged this time around," the report seen by Reuters said.

Peltz's Trian Fund Management is vying for two board seats, one for Peltz and the other for former Disney financial chief Jay Rasulo, while another activist firm, Blackwells Capital, is pushing for three board seats.

The fight over who will help guide Disney, valued at $213 billion, is one of the year's most bitter and closely watched board battles, pitting a prominent activist investor, who says he works well with target companies, against a talented media industry CEO who returned to the top job two years ago after the board fired Iger's hand-picked successor.

Peltz and Blackwells said Disney bungled plans for life after Iger, lost its creative spark and failed to properly harness new technology.

Disney previously dismissed both hedge funds' candidates' qualifications, and on Thursday said it "strongly disagrees" with ISS's recommendation as Peltz "does not bring additive skills to the board."

Shareholders will vote on April 3 and each side has now signed up prominent supporters to press its case with voters. Disney had Star Wars creator George Lucas and JP Morgan banker Jamie Dimon supporting Iger, while a number of business executives on Thursday publicly supported Peltz.

ISS said shareholders should abstain from voting for Rasulo, all three Blackwells candidates and current director Maria Elena Lagomasino. ISS described Rasulo as "levelheaded" but did not recommend him amid concerns that he might cause "friction on the board" after he was passed over for succeeding Iger some years ago. And Lagomasino, ISS wrote, was more responsible than other directors for failing to find an appropriate heir for Iger.

Earlier this week, ISS's smaller rival Glass Lewis recommended shareholders reelect all 12 of the company's directors instead of adding any dissident candidates.

ISS acknowledged that Disney, after having dragooned Iger out of retirement to return to the top job in 2022, has made positive operational changes and added two new directors.

"Iger's return may have been sufficient to plug the holes, and management has since taken several actions to plot a better course," the report said.

But it also blamed the board for not recognizing issues early enough to correct them.

Now ISS argues more outside oversight is necessary and Peltz, who has served on many public company boards, is the right person to ensure Disney "will not run aground" after Iger leaves. His contract is set to expire at the end of 2026.

As the annual meeting date draws near, the fight will likely gain more attention on social media, experts said, noting each side is now feverishly lining up prominent supporters.

A handful of business executives, including Francis Blake, Ali Dibadj and Thomas J. Usher, who have served at companies Peltz has previously targeted, issued support for the man they said some of them were initially "skeptical" about.

They wrote to the Disney board to encourage them to work with Peltz "for the benefit of all shareholders."

(Reporting by Svea Herbst-Bayliss; additional reporting by Dawn Chmielewski, editing by Jonathan Oatis, Franklin Paul and Nick Zieminski)