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At Legg Mason, uncertainty after Fetting resignation

Mark R. Fetting will step down as chairman and CEO of Legg Mason Inc. on Oct. 1, a move that raises questions about the iconic Baltimore company’s direction.

Baltimore native Mark R. Fetting became chairman and CEO of Legg Mason Inc. in January 2008.

Fetting assumed the top job at Legg Mason in January 2008, and presided over nearly five years of client redemptions and a plummeting stock price.

Some analysts, who declined to be named, suggested that influential board members pushed for Fetting’s resignation, which was announced in a news release Tuesday morning, given Legg’s failure to bounce back from the financial crisis that erupted as he took office.

Others, however, said jumping to such a conclusion was premature, and that casting all the blame on Fetting is simply the most convenient explanation.

Company spokeswoman Mary Athridge denied claims that Fetting, a Baltimore native whose grandfather served as Maryland’s comptroller from 1947 to 1950, was pushed out of the firm he had long strived to lead. The resignation was a “unanimous” decision between board members and Fetting, she said.

Joseph Sullivan, Legg Mason Inc.’s head of global distribution, will serve as interim chief executive, while Lead Independent Director W. Allen Reed will become non-executive chairman. Fetting will remain as a consultant to the Baltimore-based company through the end of the year.

Legg Mason’s stock price jumped $1.38, or 5.4 percent, to close at $26.85 Tuesday, in contrast to the steady decline of the past several years. Legg’s share price was about $70 when Fetting became CEO.

The stock price has increased 3.2 percent in the past 12 months, compared with a gain of 24 percent for the Standard & Poor’s 20-member index of custody banks and asset managers.

In the three months ended June 30, Legg Mason posted its first quarterly loss since 2009 because of expenses to restructure debt.

One source, who asked not to be named, speculated that Fetting’s resignation resulted from mounting pressure from key stockholders, and “more than a few” investors who have recently called for him to step down.

But the timing suggests otherwise, said Greggory Warren, a senior stock analyst at Morningstar who has tracked Legg Mason for about four years.

“If they wanted to remove him for bad performance, they could have done it a year ago,” Warren said.

Additionally, Fetting will serve as a consultant to the company through the end of this year, and Warren said it’s “very atypical” for a top executive to hold a consulting position after being forced out.

“The announcement usually is, the CEO is gone. He’s left the building. He’s done,” Warren said. “That’s why it just sort of seems like it’s a different story here. It just seems strange that you’d kick him out, and then keep him on as a consultant.”

He said he didn’t doubt there was a difference of opinion within the company, however.

“It potentially could be a sign that the board is interested in going in one direction and Fetting was more interested in going another direction,” Warren said. “That’s kind of the way [we at Morningstar] are looking at it.

“I think there’s definitely a back-and-forth internally over what to do with the company long-term,” he continued. “Do they split it up, do they buy themselves out and go private, do they sell themselves to another organization or do they go out and find a CEO who’s sort of a turnaround specialist who understands how to lead an organization built on affiliates?”

Legg Mason’s biggest shareholder is activist investor Nelson Peltz of Trian Fund Management LP, who joined the board in 2009 and is known for pushing companies to increase their value by reducing costs or splitting up.

Peltz, who owns 10.9 percent of the firm, is under a standstill agreement that prohibits him from increasing his voting stake or forcing the sale or merger of any of Legg’s affiliates. That deal expires in two months.

“Peltz is a big shareholder and I just think this reflects him thinking there is a lack of underlying progress,” said Jeffrey Hopson, an analyst with Stifel, Nicolaus & Co. in St. Louis. “A more likely scenario is to consider a breakup of the company.”

Legg Mason owns multiple investment units with different strategies, including fixed-income manager Western Asset Management and equity managers such as ClearBridge Advisors, Legg Mason Capital Management and Royce & Associates. The company also owns hedge fund-of-funds manager Permal Group. Each affiliate operates independently and has revenue-sharing agreements with the corporate parent.

Several sources, who declined to be named, said they thought Peltz pressured Fetting to resign or urged the board to seek new leadership, possibly setting the stage to steer the company in whatever direction he favors.

“He definitely has influence — he’s a major shareholder,” Warren said, but added that until a replacement is named, such ideas are little more than speculation.

Although there “could be something to” the notion that Peltz is manipulating or expediting the transition to new leadership, Warren pointed out that Legg officials have said they expect the search for a replacement to last a long time.

“The question is, who’s setting the strategic direction?” Warren said. “I get the sense that it’s coming down more from the board — Nelson Peltz and some of the other major shareholders. They’re the ones sort of driving where the firm is going to go long term, as opposed to the executive team. Now where that is, we don’t know yet.”

Athridge, the Legg spokeswoman, said the board is seeking a “fresh look at the company,” but declined to comment on specific disagreements between Fetting and Peltz.

“We aren’t going to discuss any Mark vs. Nelson bit,” she said.

When asked whether the board’s vision — and Peltz’s goals in particular — aligned with Fetting’s, Athridge said: “From the board’s perspective, we will continue to have a constructive relationship with Trian [Fund Management].”

Fetting completed a plan in the quarter that ended March 31 that was designed to save $130 million to $150 million a year through a combination of job cuts and moving certain technology functions to the affiliates. Since January 2008, he’s cut almost 500 jobs.

But Fetting isn’t solely responsible for the dismal numbers, Morningstar’s Warren said.

“I think there’s definitely some consideration to the fact that he inherited a mess,” Warren said. “He took over as a lot of things were imploding for them.”

Although some have touted the firm’s recent efforts, several sources said those steps haven’t added up to the heavy-hitting solution necessary to dissuade anxious investors from withdrawing their money en masse.

While long-term redemptions slowed to the weakest pace in five years amid deposits into bond funds, clients continued to pull money from higher-fee stock funds, pushing investment advisory fees down 11 percent.

Others said Fetting deserves more credit for recent progress, even if it’s been tepid.

“A lot of the heavy lifting in terms of balance sheet restructuring and improving the cost structure of the holding company has already been done,” Robert Lee, an analyst at Keefe, Bruyette & Woods Inc. in New York, wrote in a note to investors Tuesday.

Said Warren: “Because of the nature of their business … with a majority of their client base as institutions … the brand gets tarnished a bit when you go through a cycle like this. It just takes longer to recover.”

Legg’s board has formed a search committee that will consider both company executives and external candidates to replace Fetting. It will hire an executive search firm to help with the process.

Bloomberg contributed to this article.