I.S.S. Backs 2 Loeb Nominees for Sotheby’s Board

Updated, 8:21 a.m. |

Investors in Sotheby’s should vote for two of the three board nominees proposed by the activist investor Daniel S. Loeb, an influential shareholder advisory firm recommended on Thursday.

The report by the adviser, Institutional Shareholder Services, is nonbinding. But it is the biggest show of support yet for Mr. Loeb in his campaign to force change at the 270-year-old auction house.

That battle, one of the most closely watched on Wall Street, is heading to its final stages, as both sides lobby other shareholders ahead of the company’s annual meeting on May 6.

A victory for Mr. Loeb could pave the way for a shake-up of one of the world’s biggest auction houses, at a time when the art industry finds itself at a crossroads. “Sotheby’s is like an old master painting in desperate need of restoration,” he has argued, contending that it has failed to adapt to changes in the art world and to impose discipline upon itself.

But a loss for Mr. Loeb would be a rare black mark for one of Wall Street’s most feared activists, who is himself an avid art collector.

In its report, I.S.S. wrote that Mr. Loeb had made a “compelling” case that the company had underperformed financially. Its operating expenses have climbed 26 percent over the last three years, topping out at 74 percent of revenue last year.

Though I.S.S. described Mr. Loeb’s call for change somewhat broad, it agreed with some of his specific arguments for change. Sotheby’s practice of splitting its buyers commission with potential sellers of art, for instance, could limit the company’s strategic flexibility. And it needs to build out its online auction capabilities, it said.

I.S.S. ultimately concluded that two of Mr. Loeb’s nominees, himself and Olivier Reza, a former investment banker, would be of great benefit to Sotheby’s because both are active art collectors, unlike the candidates put up by the company. The third nominee is Harry Wilson, a restructuring expert who served with Mr. Loeb on the board of Yahoo.

Sotheby’s issued a statement urging its shareholders to support its slate of directors.

“Under the stewardship of Sotheby’s board of directors and management team, Sotheby’s has consistently delivered strong, long-term performance and superior value creation,” the statement said. “Now is not the time to diverge from Sotheby’s leadership and its strategic plan. We believe that replacing any of Sotheby’s director nominees with Mr. Loeb or any of his handpicked nominees could negatively impact shareholder value.”

Representatives of Mr. Loeb did not have immediate comment.