India: The good capitalist

NEW DELHI, India — India's rural cooperatives helped save millions from starvation. But with little incentive to grow and invest, small farmers and cottage craftsmen stayed small. Fabindia's William Bissell offers a new solution.

A slim and bookish 41-year-old, Bissell's side parting and earnest manner give him the air of a boy scholar. But he doesn't keep his ideas locked up in an ivory tower. A curious mix of devout capitalist and social reformer, Bissell first turned the village-based textile export company he inherited into a multimillion-dollar retailer. Then he turned it into a laboratory for an idea that could transform rural India.

In 2007, Bissell hived off a substantial portion of Fabindia's assets to create a new firm dedicated to investing in and promoting community-owned companies comprising the retailer's rural artisan suppliers. The scheme is based on an innovative system that makes workers into shareholders and creates its own micro stock exchange. And if Fabindia can work out the kinks, it could translate the old idea of agrarian cooperatives into fast-growing firms capable of simultaneously unleashing capitalism's unrivaled energy and reigning in its destructive appetites.

“I'm a communitarian. That's where the philosophical underpinning comes from,” said Bissell. “What's interesting to me is how to use capitalism, the way it organizes capital and information and shares and distributes wealth – because it is a fairly comprehensive ideology – to produce beneficial outcomes for society.”

Founded in 1960 by William's father, John Bissell, an American who'd worked as a consultant for the Ford Foundation, Fabindia arose as an export firm that marketed India's rich heritage of handloom fabrics to the world. The company began to shift focus to the domestic market in 1976, when it opened its first retail outlet in Delhi.

But it was after William took over in 1998 that the firm really took off. In less than a decade, the young entrepreneur built Fabindia into a 112-store, $75 million retailer with outlets in Rome, Dubai and Guangzhou, expanding the product line to include designer clothes, jewelry, home furnishings, body care products and organic foods — all without straying from the company's socially conscious roots. Giving usually staid handicrafts a slick, modern spin, it's Pottery Barn meets The Body Shop meets Pier One — the company is incredibly popular with ordinary Indians, posh socialites and Western expatriates alike.

But Bissell isn't resting on his laurels. He is reinventing the company again.

The essentials of Fabindia's new business model are simple. Bissell first created Artisans Microfinance (AMFL), an investment company, which identified and helped fund 17 community-owned firms that Fabindia calls “supplier-region companies,” or SRCs. Many of these firms had at their core non-profits and cooperatives that had been Fabindia suppliers for two generations.

But when they were restructured, their artisan-workers bought shares in the future — and a guaranteed piece of Fabindia's pie. By tapping the locals and angel investors, Fabindia got a 50-percent boost in investment. More importantly, the SRC shares have already appreciated 50 percent and more, said Prableen Sabhaney, a Fabindia spokesperson. Returns like those – and the jobs they generate – could spell an end to rural poverty and the ills of urban migration.

Hiving off management responsibilities to shareholder-owned companies promises to make Fabindia more efficient, too. Now, instead of dealing with more than 700 individual suppliers, the corporation only deals with 17 SRCs. That already means it can handle larger volumes and theoretically gives smaller artisans and suppliers a better chance to showcase their products locally and break into the retailer's supply chain.

But there have been growing pains. In some cases, instead of looking for new sources for products, the SRCs took the easiest route — resting on their laurels and relying on supplier companies that were almost as large as the community-owned units themselves.

“We had too many carrots and not enough sticks,” Bissell said. “Now we've given some of their suppliers the ability to come to us directly to make the SRCs feel that they need to sing for their supper. Because just sitting around and expecting checks to roll in is not the model that we had in mind.”

Bissell's community-owned companies represent a marked change from the rural cooperative. Currently, Fabindia still owns about half the stock of the SRCs. But within five to seven years Bissell plans to reduce that to about a fourth, as artisans, employees and outside investors pick up more stock.

Unlike in traditional cooperatives, however, where members have equal voting rights regardless of their investment or productivity, SRCs will reward the artisans who hold larger stakes in the units with a larger say in how they are run. Shareholders also reap rewards from the company's growth in direct proportion to how much — and how early — they invested. That means that, like cooperatives, the SRCs provide a vehicle for small, cash-starved rural artisans to pool their money to expand and modernize their operations. But unlike cooperatives, they give the savviest and most successful of the bunch a very strong motive to invest.

“The person who uses the cooperative most benefits the most as well — not the person who started the cooperative and took the risk. So that basically means that nobody individually will take the risk,” said Vineet Rai, the founder of Aavishkaar. Unlike cooperatives, which also prohibit outside investors, the shareholder system of Fabindia's community-owned companies encourages entrepreneurial investment by promising a larger payoff to the early movers when the firm grows.

And that could mean rapid growth for rural India, too.