Legg Mason headquarters

Legg Mason headquarters at 100 International Drive in Harbor East. (Kim Hairston/Baltimore Sun Staff / February 8, 2013)

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.