At Ethan Allen, Selling Furniture and Tolerance

CEO Farooq Kathwari has revitalized the company, while leading a campaign to bring peace to Kashmir

Grief, comfort, gratitude, patriotism. That was the language of most chief executives' messages in newspapers around the country after the violence of Sept. 11. But M. Farooq Kathwari, the head of furniture retailer Ethan Allen Interiors Inc. (ETH ), a Muslim who left Kashmir some 35 years ago and now an American citizen trying to bring peace to that troubled place, wrote of something else. Deep sadness, yes. But also of the need to "foster unity among people of different faiths." As community leaders have stated in the days since the Twin Towers fell, Kathwari says: "The terrorists win if the search for justice turns to vengeance."

Kathwari, 57, knows something of how grief and anger work on people. His eldest son was killed in Afghanistan in 1992: Imran, a 19-year-old college student born and raised in America, was drawn there by romantic notions of the fight against the Russians (and by that time, the regime they backed), says Kathwari. Imran went despite the family's opposition. He died in a mortar attack, in one of the last battles for the capital, Kabul. "My son is lying in rubble in Afghanistan," Kathwari says.

A death like that could make a parent bitter for life. And Kathwari was for a while. But eventually he decided to get involved, not in Afghanistan but in Kashmir, as a diplomat of sorts. At least 35,000 Kashmiris have died or disappeared since 1989, when their renewed call for more autonomy, if not independence, from India, sparked a rebellion that Pakistan supports. Kathwari, once a student activist in Kashmir, brought together a group of predominantly American politicians, academics, and former diplomats in 1996 to suggest ways to end the civil strife. Kathwari, talking publicly about his work there for the first time, says: "I wanted to try to save parents from the agony of losing a child. And Kashmir helps me maintain perspective."

What makes Kathwari's experience so interesting is the way in which it has influenced his leadership at Ethan Allen, that most traditional of American retail icons. He's as demanding as any CEO. But colleagues also talk about his sense of justice and humility. As Sandra Lamenza, vice-president and general manager of the retail division, puts it: "Ego is not tolerated. You can't throw power around."

Kathwari, who grew up in a privileged, politically active family, left Kashmir in 1965 to obtain an MBA at New York University. After a few years on Wall Street, he began importing handicrafts from Kashmir. In 1980, Kathwari sold his company to Ethan Allen, an early client, and five years later he was promoted to president.

Since then he has changed almost everything about Ethan Allen: the furniture, the design of its 300-plus stores, its relationship with dealers, and the senior management, almost all of whom retired between 1988 and 1990. Ethan Allen used to sell traditional furniture, some of which hadn't been updated in 40 years, in stores that even employees say looked like colonial museums. "Ethan Allen was a trusted, dusty brand in danger of going the way of the Oldsmobile," says Simon Williams, chairman of brand consultant Sterling Group in New York. Kathwari and his designers made over its Valley Forge look to suit modern tastes and they now launch new collections more frequently. They have also remodeled most stores and relocated half to prime retail space.

At the same time, Kathwari took on the independent dealers who sold most of Ethan Allen's furniture. Breaking with industry protocol, he told them to sell only the company's merchandise at one price to be set in the Danbury (Conn.) headquarters. He also required them all to buy the furniture at the same price; before, the bigger dealers received a discount. Several of them confronted Kathwari in 1986, saying: "Do you think you are Robin Hood? You're giving to smaller dealers at [our] expense." To Kathwari it was an issue of fairness, and that was that. Two dealers walked out.

A MESSAGE. Now the transformation is almost complete. To fend off a hostile bid in 1989, Kathwari led a $350 million buyout; that gave him a 10% stake in the company and more operational control. Kathwari took Ethan Allen public again in 1993. At most stores, sales have tripled since 1985, and the company's profit margins are the highest of any furniture manufacturer. But of course, no business is immune to the slowing economy and the likelihood of protracted military action. Profits for the fiscal year that ended on June 30 were $84 million, down 7% from a year ago. Sales were $904 million, up 5.6%. As late as June the stock price was holding up well, at about $38. Now it's trading around $30. To reduce costs, Kathwari closed three U.S. factories this year and he is moving some production to Southeast Asia. He still expects sales to grow 5% in 2001. Though that may be optimistic these days, the company does have a strong enough balance sheet to weather a recession.

Kathwari talks often about establishing "a moral precedent" at Ethan Allen. When Corey Whitely, vice-president of retail operations, won the company's Golden Kite achievement award in 2000, Kathwari said he should think of it as recognition that he fulfilled his responsibilities with modesty. And when the company bought a plant in Virginia ten months ago, he told Charlie Farfaglia, vice-president of human resources, to recognize the employees' service with the old company when determining benefits. Kathwari also speaks of religious tolerance, when speaking of it seems appropriate. At a Christmas dinner he hosted, he read from the Koran about the birth of Jesus. After Sept. 11, the staff agreed Ethan Allen should put a public message in a few newspapers. "They know of my loss. They know I believe injustice is a sin," he says. Kathwari wrote the note himself.

Kathwari is intimately involved, some would say overly, in running the company. That doesn't work to everyone's benefit. After years of operating without a chief financial officer--the company has a controller--Kathwari decided last year to hire William Beisswanger from Ernst & Young LLP. He left after nine months. Beisswanger would only say that "Farooq is very hands-on. I didn't think it was the right place for me." Kathwari has since hired someone else.

Any difficulties with the turnaround pale alongside Kathwari's efforts to bring peace to Kashmir. The Kashmir Study Group is an independent effort, initially welcomed by no one and still criticized by some as out of touch. But over the past five years, Kathwari has largely persuaded Indian and Pakistani officials that he is serious, fair, and worth their time. "He and his project are highly respected by both sides as well as the U.S. government," says a Bush Administration official.

The group's report, released in early 2000, offers a supple approach to sovereignty, giving Kashmiris (a majority of whom are Muslim) the right to rule themselves within India or Pakistan. That is a controversial notion among Indians who want to retain control, and some of them view Kathwari with suspicion. "They've asked the leaders to imagine a settlement that's fair to both. It's very helpful just to get people thinking about that," says Frank C. Wisner, a former ambassador to India who is now a director at Ethan Allen. Last year Kathwari met with Pakistan's ruler, President Pervez Musharraf, and Indian officials close to Prime Minister Atal Behari Vajpayee; he was one of many urging them to talk. The two met in the Indian city of Agra in July and are considering another summit. The violence continues: A car bomb exploded near the state legislature Oct. 1, killing at least 40 people. Now, though, there may be more pressure to bring peace to Kashmir, says Kathwari, because then "those fighting jihad there would lose an important base."

Kathwari insists that his work in Kashmir didn't distract him from Ethan Allen, and the board doesn't seem worried. "It helps give him a sense of value beyond the furniture business," says Edward H. Meyer, a director and head of Grey Global Group Inc., an advertising agency in New York. Who can argue with that?

Corrections and Clarifications In ``Selling Furniture and Tolerance'' (People, Oct. 22) about Ethan Allen Interiors Inc. CEO M. Farooq Kathwari, the name of Kathwari's late son should have been Irfan. BusinessWeek apologizes for the error.

By Susan Berfield in New York, with bureau reports

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