Industry experts suggest what Legg Mason's new CEO must do

Boosting investment performance is a start

  • Legg Mason headquarters at 100 International Drive in Harbor East.
Legg Mason headquarters at 100 International Drive in Harbor… (Kim Hairston/Baltimore…)
February 08, 2013|By Eileen Ambrose, The Baltimore Sun

After more than four months without a permanent leader, Legg Mason Inc.'s search for a new CEO might finally be near the end.

It probably can't come soon enough for employees and investors who have lived through months of uncertainty.

"The longer it takes to find a successor, the more trying it is to everyone's patience," said James Hardesty, chairman of Hardesty Capital Management in Baltimore.

Rumors have circulated about potential outside candidates, although as time passed, interim CEO Joseph A. Sullivan is believed by some analysts to have the inside track.

But whomever Legg's board of directors chooses to become the third CEO in the firm's history faces a host of issues — from investors pulling money out of its funds to the need to assuage the gripes of affiliates that manage its investment funds.

Money continues to flow out of its funds — a trend that's occurred in all but one quarter going back to 2007. The company now manages one-third less than it did at its peak six years ago.

And Legg is coming off its worst quarterly loss — $454 million — in five years. The loss was driven by a writedown of assets at one of the affiliates. Legg shares have languished in the mid-20s for more than a year. The stock closed Friday at $27.23 per share, nearly 80 percent lower than its peak seven years ago.

Former CEO and Chairman Mark R. Fetting spent nearly five years trying to reverse these trends before stepping down in October. Analysts say Fetting's departure came amid pressure from Legg director and activist shareholder Nelson Peltz, whose Trian Fund Management L.P. in New York is Legg's second-largest investor.

The new CEO will need to answer questions about Legg's direction, including addressing recent speculation that the company might be split up, said Daniel McHugh, president of Lombard Securities in Baltimore.

"There has been a lot of faith lost in Legg Mason in the recent past," McHugh said.

It will be especially important that the CEO articulates this message to employees, who have been distracted lately, he said.

"Anytime you have to go to work in an environment where a good deal of the day is taken up with speculation about who is going to lead the company forward, I don't think it's necessarily good for productivity," McHugh said. "People will have to see consistency."

Legg's next CEO also must decide what type of asset manager the company wants to be, said Russ Wermers, associate professor of finance at the University of Maryland, College Park's Robert H. Smith School of Business and a Legg shareholder. Should it rely on the draw of a star manager as it has in the past, Wermers said, or turn to a team approach?

Legg built its reputation largely on the stock-picking skills of money manager Bill Miller, whose fund famously beat its stock market benchmark 15 years in a row. When Miller's streak ended in 2006, Legg's fortunes fell, too.

"They relied too much on star power," Wermers said.

Legg has nearly $649 billion in assets under management, down from a peak of more than $1 trillion in 2007.

If Legg sticks with the star model, Wermers said, it "can't just have one star manager. You have to have a succession plan."

Craig Sterling, managing director with EVA Dimensions in New York, said the top priority for the new CEO should be to boost the investment performance of the funds. That would stem the outflow of investor dollars and attract new money.

But it could take a few years to develop a better record, Sterling said.

Meanwhile, the CEO should look for ways to reduce Legg's expenses, which tend to be higher than its peers, he said.

"If they take an underperforming fund and fold that into a better performer, you need less people, you need less office space, and that all goes to the bottom line," Sterling said.

Legg is doing some of that already.

Last month it announced that it would merge Legg Mason Capital Management, the Baltimore unit that rose to prominence under Miller, into a much larger affiliate in New York. The company said a small number of employees would lose their jobs.

As part of that merger, too, the company plans to sublease 78,000 square feet at the Legg Mason tower in Harbor East, reducing its real estate costs there.

Dick O'Brien, senior executive vice president of Folger Nolan Fleming Douglas brokerage in Hunt Valley and a Legg shareholder, said the next leader needs to cultivate greater harmony among the affiliates.

Once Legg merges Capital Management into ClearBridge Investments in June, the company will have eight major affiliates. Each operates as a separate business with a different revenue-sharing agreement with the parent company.

"They still need to have their autonomy," O'Brien said. "But at the same time, there must be some areas of mutual cooperation that could exist."

For instance, Legg could leverage its affiliates' client relationships, perhaps by introducing fixed-income customers to its equity products, O'Brien suggested. That doesn't seem to be happening now, he said.

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