n 2006, after delivering a lecture at Harvard Business School, The Cleveland Clinic’s CEO Toby Cosgrove listened to a student who explained that he found the clinic lacking in empathy. “So when my mother needed mitral valve replacement, I referred her to the Mayo Clinic. They are much more patient-friendly.” Despite its top-notch record in mitral valve surgery—a failure rate only one-tenth the national average—The Cleveland Clinic, Cuyahoga County’s largest employer, was losing business. Cosgrove immediately recognized that he needed to look substantially beyond science and patient outcomes to keep the clinic in its position of global leadership. He needed to move the focus outside the operating room and start thinking about Cuyahoga County.

Westpac, a leading financial institution in Australia, announced record profits in the mid-1990s. And the stock fell 7 percent in a week. The shareholders didn’t like that the bank was making a financially smart move by closing some branches, and the bank’s CEO at the time, Bob Jos, knew change was required.

In the 1990s, Shao Ming Lo, the chairman of Bright China, a development corporation in China, was in an airport in North America, where he was amazed to see cleaning workers who were respected by the public and enjoyed their work. He went home to Shanghai committed to bringing that respect to Chinese workers. Like Gandhi in the 1940s, Chm. Shao believed that the only way to bring about such a change was to be responsible for creating it.

These aha! moments changed the three business leaders’ understanding of the challenges they faced—and subsequently changed the paths of their organizations. In 1917, the Supreme Court declared it illegal for businesses to make decisions on any other basis than shareholders’ financial value. Today, if an enterprise is set up solely to maximize profits or shareholder value, it is likely to fail, no matter how successful it is.

Consider Wal-Mart. In the 1970s, it became the world’s biggest retailer by maximizing scale and efficiency—selling the most goods fastest. In 2000 and 2001, however, the media highlighted Wal-Mart behavior—locking in illegal immigrants to get a store cleaned, and putting factories out of business to get the cheapest goods. Now Wal-Mart management has recognized that low cost is not enough. It is developing health insurance programs, carrying organic products, and touting not just low prices but the quality of its merchandise.

Periodically, management practice reaches a “frontier” and creates a revolution in business theory and radically improves the performance of leading organizations and their ability to create customers. Henry Ford’s assembly line and Frederick W. Taylor’s Scientific Management ensured that business in the 1900s looked completely different from business in the 1800s. In the late 1970s, prompted by Michael Porter, strategy moved from a military term to a business term. Managers began valuing seeing around corners—not just doing more of the same and building scale.

Yet another revolution, in the 1980s, transformed quality from America’s enemy to its weapon of choice—redefining how large organizations thought and operated. In 1980, Motorola’s operations objectives focused on shipments and costs, targeting 10 percent improvements as heroic. By 1985, the head of a Motorola plant might say, “We are sitting at 2,000 parts per million and have to target 3.4 parts per million.” That 99.7 percent improvement required redesigning or eliminating the most basic processes and parts, and it consequently drove performance well beyond management’s comfort zone.

Today, the global business community is undergoing another management revolution—infusing corporate social responsibility (CSR) into the way an enterprise defines its assets, identity, and way of doing business. More than an idea, CSR has a demonstrated bottom-line impact. In 2007, Business Week found that the stock value premium of five companies known for social responsibility was more than 5 percent higher than that of their leading direct competitors. That same year, 44 companies with outstanding scores on social responsibility indices outperformed the overall Morgan Stanley Capital International World Index by over 25 percent in two-year value growth, according to GS Sustain, a July 2007 Goldman Sachs report. Now CSR has become part of the mainstream conversation. Over 1,000 of the world’s largest corporations are measuring their level of responsibility with the Global Business Responsibility Index. CSR is transforming the theory of business assets, the economics of decisions, the market perception of value, and the capability of enterprises to deliver value over the next decade. In our borderless, information-rich world, the CSR imperative is magnified in scale and urgency, and no enterprise can avoid scrutiny.

The visionary who defined this imperative 65 years ago was Peter F. Drucker, who sounded the call in his book The Industrial Man in 1942. Drucker understood that investing in social assets is at the heart of creating customers, and he repeated this call in many subsequent writings and decades of consultation with CEOs. Without a customer today, he said, the enterprise has no purpose. Without a customer tomorrow, the enterprise has no longevity or sustainability. Without a society or community, there is no enterprise. Investment in social assets is a common requirement to all three realities.

Thus 21st-century enterprises are defining capital much more broadly than the traditional financial term. Financial capital must be supplemented by social capital: people and capability, emotional capital, environmental capital, quality of life, and political capital. (See Figure 1.) Each is an asset with its own return on investment, contributing to a collective ROI that creates customers and ensures sustainability.

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Figure 1. Forms of Capital

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Using investment in social assets as an indicator of innovative and effective CSR, and with the help of 12 Drucker societies worldwide, we identified three notable leaders in the CSR revolution, whose practices are upending business theory today: Westpac, Bright China, and The Cleveland Clinic. In the following sections we document how each is contributing to the next management revolution.

In 1817, when Governor Lachlan Macquarie established the Bank of New South Wales (later renamed Westpac), Australia had no currency of its own. Believing that the new nation required a monetary system, Governor Macquarie founded the country’s first company and first bank. Over time the bank became known for its commitment to regional Australia and its strong focus on customer service.

In the late 1980s and early 1990s, the industry was undergoing deregulation and Westpac, dazzled by opportunities to cut costs and boost stock value, made some missteps. For example, the Australian government had historically mandated that welfare monies automatically be deposited into the recipient’s bank account. However, with the advent of transaction fees for all customers, welfare recipients had to pay to access their welfare benefits. Management didn’t consider this aspect, being focused instead on the surging stock value.

As David Morgan, then Westpac’s president, recalls, “People had lost sight of our underpinnings. We weren’t unique: partly from deregulation, partly technology and partly globalization, we were an organization struggling with new freedoms and misunderstood the responsibilities that went with it. Hubris and a few other things took over.” In the mid-1990s, management got a wake-up call as the customers and even some investors were making their views known.

In 1996, when the CEO announced record profits, investors shocked the board when they didn’t respond with acclaim. In fact, the community was in open outrage about the behavior of banks overall, and Westpac as one of them. Banks were closing unprofitable branches with the assumption that technology advances could substitute for a brick-and-mortar location in the affected communities. The bank was not being socially responsible and there was a clear lack of trust with the community. Record earnings were not reflected in Westpac’s stock performance.

By highlighting the gap between community perception and the bank’s underpinnings, the senior management team was able to persuade the board to rethink the bank’s course and take decisive action. For example, Westpac put a moratorium on any further removal of face-to-face banking services. In areas where conventional branches were “unprofitable,” Westpac got rid of free-standing branches and partnered with local retailers. Where branches had already been closed, they were reinstated in retail buildings with extended hours. The solution reduced costs by about 17 percent.

In addition, the bank developed a set of principles that included a commitment to build financial literacy throughout the community to help citizens develop “more effective money management skills” and hence a better quality of life. Complementing the bank’s financial literacy programs is its drive to ensure transparency in pricing and marketing, including fees and charges. (Morgan noted that had banks in the United States been more committed to financial literacy and absolute transparency perhaps the current sub-prime crisis could have been avoided.) Westpac also has systematic triggers in place that prompt it to contact its borrowers in financially stressed situations before it is too late to avoid default by offering “payment holidays” and other options to relieve temporary problems.

Westpac’s community investments and focused investments in its staff have turned around employee perception of the bank as well. Management learned that if your own staff is not advocating for your company, you will be in trouble. Westpac’s investments in its people indicate the bank’s understanding that the advent of educated knowledge workers has shifted the initiative from the employer to the employee. Today’s educated workers rightly resist being managed; they need to be largely self-managing. Shared values, transparency in communications, and mutual respect are requirements for effective self-management, and Westpac’s principles support all three. Today, Westpac is considered one of the most desirable employers in Australia.

CSR is now firmly embedded in Westpac’s DNA. Westpac is careful to track and monitor its performance against its mission and values. According to its own measurements, it took five years to return the bank to favor in the court of public opinion. Westpac is weathering the current market turmoil fairly well.

Bright China’s management team believes that for China to become a sustainable, functioning society, its business leaders must proactively address community services needs and create opportunity and respect for everyone. For its first 15 years, the management team led a real estate development company with a socially responsible outlook—in contrast to what we read about much of China’s enterprise, which is known for horrific industrial assault on the environment, abuse of quality, and exploitation of labor. Bright China’s management believes that if leaders better understood the responsibility of management, the vast majority of enterprises in China would be socially responsible. Hence, in the late 1990s, its mission and investments were broadened to help all of China learn how to lead in the Drucker way.

By 1999, in part because of the Bright China Service Industry experience, Shao and his management team had come to believe that China’s management needed training. The team believed that the underlying Chinese culture would support and even embrace social responsibility. Yet a manager was often seen as a controlling profit-seeker. This prompted the second strategic social investment—a management-training institute. After visiting and studying many of the top universities worldwide, Chm. Shao concluded that China needed a nontraditional institute. He then went to California to visit the ninety-year-old Peter Drucker. With Drucker’s encouragement, the Bright China Management Institute was launched. It now has 25,000 alumni and operates programs in 10 provinces and Hong Kong with a staff of 22 full-timers and 10 part-timers.

The Bright China management team’s third strategic investment is in the Bright China Foundation, established to help educate and build entrepreneurial capabilities in rural areas and prisons. Since 2003, Bright China has invested in the foundation, which has provided scholarships to over 19,000 students. Its entrepreneurship program operates in six rural provinces and is targeting to train 16 million vocational students and a million prisoners over the next five years. Each of Bright China’s investments is linked to its overall goal: to help create a sustainable, functioning society in China with a new kind of managerial culture, and where the level of health care and services for the less fortunate is elevated. Bright China’s management team is currently revisiting its mission and purpose with the aim of again broadening it to capture emerging social opportunities, all in the spirit of better serving the society in which it operates. For example, an effort is under way to support the needs of the emerging social entrepreneurs in Hong Kong.

The Bright China model of linking profit, nonprofit, and education under a broader organizational umbrella would be unusual in any nation. That this model was developed in China is compelling evidence of the power of management determination against all odds.

Recalling his “aha moment” at Harvard in 2006, Dr. Toby Cosgrove, the CEO, remembers, “I couldn’t get the fact out of my mind that we would lose market share and lose employment for our community.” Dr. Cosgrove concluded, “Cleveland Clinic cannot continue to just get the best outcomes in patient care. It is not enough.” So he investigated the Mayo Clinic and learned that part of its advantage is its community engagement.

Dr. Cosgrove realized that his vision had to extend to all of Cuyahoga County and include some bold and explicit strategic investments. A chief wellness officer (CWO) joined the C-suite and the clinic’s mission was modified to focus on wellness of the county. The clinic is investing $30 million in nonfinancial social assets to help individuals adopt healthier behaviors and reduce health care costs by more than 10 percent, or $1 billion in Cuyahoga County alone—a significant return for the community and a “hook” to attract future employers.

To make this Big Hairy Audacious Goal (BHAG) a reality, CWO Dr. Roizen is working to realize the clinic’s long-term goal through both internal and external initiatives. This is his passion—and his challenge is to make it everyone’s passion. Internally, 33 wellness groups have been launched (one at each clinic site) to test new ways of doing business and new investments in the wellness of employees.

The Cleveland Clinic’s funding of employee health insurance is a good example of a new way of doing business. The clinic assumes a certain fraction of employees’ health care costs provided the employees each do five things every year: get their blood pressure measured, get their waist measured, have their blood tested for TB, develop a plan for healthy living, and take one of five general health risk assessments. Initially many individuals said, “Oh, I don’t want to do that,” but nonparticipation is an option that few can afford; virtually everyone employed by the clinic has started complying.

Externally, the investment is in programs targeting top themes and at-risk neighborhoods. For example, the clinic is providing free tobacco cessation programs to everyone in the county. Initial results look encouraging. To date, the program has cost the Cleveland Clinic about $92 per year of life saved. Compare this to the cost of saving a year of life when high blood pressure is an issue—$30,000 to $60,000. The same approach is being taken with nutrition. The Cleveland Clinic is both educating the population and helping make healthy food available.

The results of these social investments are beginning to be tracked. Measures include

• Percentage of employees contributing ideas, and percentage of ideas tested and institutionalized
• Adherence to programs and cause of deviations
• Percentage of population with healthier habits overall and percentage of population that shifted from unhealthy to healthy habits each quarter
• The per-capita health care cost in the county compared with Ohio as a whole

In Dr. Roizen’s words, “The realization that Cleveland Clinic has to take care of our employees and the community is gradually transforming us into a much more socially responsible organization.”

Although it is premature to discuss results, the excitement inside the clinic is palpable. Over the next 12 months, results should start being seen inside the clinic and at the base level in the community. As indicators come in, the program will adjust and if successful be emulated elsewhere.

All three of the organizations we examined are strongly championing CSR and investing in all types of assets and capital, social as well as financial. When all is said and done, we expect that social responsibility will be built into the business theory that drives not just these organizations, but many of their competitors. As at Cleveland Clinic, wellness will be an essential component of health care. As at Bright China, not-for-profits and foundations will be an essential component of a private sector that embraces social responsibility. As at Westpac, decision making will be based on all the assets of an enterprise—not just the financial ones.