Two insiders in the hunt for Legg Mason CEO title

Two internal candidates have emerged in Legg Mason Inc's search for its next chief executive, said people familiar with the matter.

Sales chief and interim chief executive Joseph Sullivan and senior executive vice-president Ronald Dewhurst, who currently oversees affiliate relations, are on a slate of about half a dozen candidates being considered to replace Mark Fetting, who stepped down as CEO in October, said these people who did not want to be named because of the sensitivity of the situation.

The Baltimore fund firm has struggled to keep investor cash and faces tensions among its affiliates. The 114-year-old company also has an activist investor on its board, Nelson Peltz, known for shaking up companies in which he hold shares.

Legg Mason's board has already given Sullivan some room to run, said Gabelli & Co analyst Mac Sykes, noting how last month Legg Mason's Permal unit agreed to buy a London financial firm. The deal "shows some confidence in his execution capability" on the part of the board, Sykes said.

Considering Dewhurst for the role meanwhile suggests Legg Mason's board is squarely focused on improving on affiliate relations. Dewhurst, named Head of Global Investment Managers at Legg Mason at the end of 2010, has been in charge of strategic efforts to build business at the affiliates, each of which has its own unique deal to split revenue with the parent.

Like rivals Affiliated Managers Group and the Boston-based asset management unit of Old Mutual PLC , among others, Legg Mason operates autonomous investment units. But business partners have complained of a lack of co-ordination among the Legg Mason divisions, while some of the affiliates want more help selling funds from Legg Mason's central distribution group. These tensions hastened Fetting's departure.

Meanwhile, Legg Mason's share price has not recovered after the financial crisis. Performance fell off at divisions like its big Western Asset Management bond shop and at Legg Mason Capital Management, leading investors to pull money out.

Performance has since come back and in October Legg Mason reported its first quarterly net inflow since 2007. To keep moving forward, Legg Mason's next leader will have to sort out just what help the central company can provide the affiliates, analysts say.

The Permal deal struck last month hints that Sullivan and Dewhurst share the goal of repairing the relationships. When Permal said on December 13 that it would buy London-based hedge fund firm Fauchier Partners, for instance, Legg Mason also said it had revised its terms with the affiliate. Legg Mason agreed to share some compensation costs in exchange for a greater share of revenues if Permal's business grows.

In its latest proxy filing Legg Mason credited Dewhurst with "improving the relationships and communications with the managements of Legg Mason's asset managers and continuing to develop the role of Legg Mason's global investment managers oversight group." Dewhurst has been at Legg Mason for five years and previously led the firm's international efforts from offices in London and Melbourne, Australia.

Sullivan, meanwhile, was credited with "successfully reorganizing Legg Mason's centralized global distribution operations, developing new compensation plans for sales personnel and launching several successful products over the fiscal year," according to the same proxy filing.

Legg Mason spokeswoman Mary Athridge said board chair Allen Reed, Sullivan and Dewhurst all declined to comment.

"We're continuing to work toward making a decision in an expeditious manner," she said of the CEO search process.

(Reporting By Ross Kerber; Editing by Jennifer Merritt, Bernard Orr)