(Adds details from report, Elliott response)
By Michael Flaherty
May 15 (Reuters) - Proxy advisory firm Institutional Shareholder Services Inc recommended on Monday that shareholders of specialty metals company Arconic Inc vote for two of activist investor Elliott's four board director nominees.
The recommendation is a blow to Arconic, the $10 billion company that separated from aluminum maker Alcoa Corp. last year, and has since been fending off Elliott's efforts to overhaul the company's strategy and leadership.
Arconic, based in New York, failed to get ISS's recommendation for any one of four director positions being contested by Elliott. Elliott supports the election of Ulrich Schmidt, one of five directors up for election at this year's shareholders meeting.
Negotiations between Elliott and Arconic to avoid a proxy contest broke down shortly after the resignation last month of Arconic Chief Executive Officer Klaus Kleinfeld. His departure followed a letter he sent to Elliott founder Paul Singer that was deemed as inappropriate.
"As the dissident has already achieved its explicitly stated primary goal (of removing Klaus from Arconic), the need to support all four dissident nominees seems less urgent," ISS said in its recommendation.
ISS recommended that the two Elliott nominees that Arconic shareholders should support are Chris Ayers and Elmer Doty.
The shareholder vote on Arconic's board directors is scheduled for May 25.
"Elliott believes that all four of the highly qualified, independent shareholder nominees deserve the support of all Arconic shareholders," the hedge fund said in a statement on Monday.
The results of a proxy fight often come down to the votes of one or two large index funds, who tend to vote based on their own analysis and recommendations.
Still, many funds do follow the recommendation of ISS, making Arconic's ability to defeat Elliott all the 7more difficult.
Glass Lewis, a smaller proxy advisor, has recommended previously that shareholders vote for all of Elliot's board candidates.
Editing by Cynthia Osterman