By Alexandria Sage

SAN FRANCISCO (Reuters) - An investor group called on Tesla Motors Corp <TSLA.O> on Tuesday to add two independent directors to its board and separate the roles of chairman and chief executive as it highlighted founder and CEO Elon Musk's dominance of the board in the wake of Tesla's proposed bid for SolarCity.

Musk is also the chairman and largest shareholder of SolarCity Corp <SCTY.O>.

CtW Investment Group, which works with union-based pension funds and holds 200,000 shares of Tesla, in a letter to Silicon Valley-based Tesla, demanded the implementation of five steps it said would remedy Tesla's "underlying governance deficiencies."

In addition to adding two permanent independent directors and separating the chairman and CEO roles, CtW called for two independent directors to form a special committee to review the proposed SolarCity deal; a declassification of the board so that stockholders may have an annual say on the election of all directors; and revision of the corporate governance guidelines to forbid that immediate family members of board members serve concurrently on the board.

Telsa board member Kimbal Musk, who is CEO of Medium Inc, an internet software company based in Boulder, Colorado, is the brother of Elon Musk.

Tesla last week proposed an up to $2.8 billion all-stock acquisition of U.S. solar installer Solar City.

"The fiercely negative reaction to the proposed transaction only highlights the flawed (corporate governance) process and underscores our continuing concern about governance at the company," CtW Executive Director Dieter Waizenegger wrote in the letter.

"We believe the board of directors at Tesla must be restructured in order to insure that stockholder interests are protected during this proposed acquisition and going forward,"

Waizenegger wrote.

Tesla said its directors acted in the company's best interest in the proposed SolarCity acquisition.

"Tesla’s disinterested directors unanimously concluded that SolarCity is the most attractive asset in the solar market and that a combination can generate significant product and financial benefits," the company said in a statement.

"Ultimately, our disinterested shareholders will have the final say on whether this combination is right for Tesla," it added. "Nobody has more at stake in the success of Tesla than Elon, and he and our Board have overseen the creation of tremendous value for all of Tesla’s stockholders."

Shares of Tesla fell as much as 10 percent the day after Musk announced the SolarCity proposal on June 21.

Musk owns 19 percent of Tesla and 22 percent of SolarCity.

Waizenegger said the complex web of relationships among Tesla board members and companies controlled by Musk or his family members "give rise to self-dealing behavior when transactions like that proposed with SolarCity are undertaken."

Five of SolarCity's eight board have recused themselves from ruling on the Tesla deal because of their ties to the company or to Musk.

On Monday, SolarCity said it had formed a special committee of just two directors, Donald Kendall and Nancy Pfund, to evaluate Tesla's offer. Kendall, the chief executive of investment management firm Kenmont, is the only member of SolarCity's board with no direct ties to Tesla.

(Reporting by Alexandria Sage; Editing by Leslie Adler)