(Adds background to dispute between LSE and TCI)
LONDON, Dec 6 (Reuters) - Hedge fund TCI has suffered a setback in its campaign to oust the chairman of the London Stock Exchange after influential advisory group Institutional Shareholder Services recommended that investors vote against the activist's proposal.
TCI, which has a 5 percent stake in the LSE, "has not made a sufficiently convincing case for the immediate removal" of LSE Chairman Donald Brydon, proxy adviser ISS said in a report published on Wednesday.
It said that other LSE investors should vote against TCI's resolution calling for the departure of Brydon at a shareholder meeting called by the hedge fund to be held on Dec. 19.
The recommendation by ISS marks the latest twist in the corporate governance crisis at the exchange that has already left the City institution without a permanent chief executive.
"Support for the removal of the chairman would equate to a strong judgment call against the board, and simultaneously looking for a new chairman and CEO would be far from ideal," ISS said.
"On the other hand, keeping Donald Brydon as chairman for a limited time would provide stability and continuity and he has substantial experience hiring CEOs." The LSE announced in October that long-serving CEO Xavier Rolet would leave by the end of 2018, prompting the hedge fund to accuse Brydon of forcing out the Frenchman.
TCI, led by founder Christopher Hohn, then launched a campaign to keep Rolet as CEO until 2021 and push Brydon from the board.
To try to stem the escalating crisis, Rolet quit as chief executive with immediate effect at the boards request on Nov. 29, saying he would not return "under any circumstances."
On the same day, the LSE said that Brydon had indicated he would not seek re-election at the companys annual general meeting in 2019.
While that prompted TCI to drop its call for Rolet to stay, the hedge fund has continued to push for Brydon to leave immediately so that he is not involved in the process of selecting a new CEO.
David Warren, the LSE's chief financial officer, has replaced Rolet on an interim basis.
TCI declined to comment on the ISS recommendation. (Reporting by Ben Martin; editing by Simon Jessop and Keith Weir)