(FORTUNE Small Business) – In the fall of 1988, Jordan Kassalow staggered into the lobby of the luxurious Peninsula Hotel in Hong Kong with a knapsack on his back and a parasite he'd picked up God-knew-where in his stomach. A young student of optometry, Kassalow was on his way to a rural health clinic in India, and he couldn't help staring at his old friend, Scott Berrie, who was waiting for him. Berrie was 10 pounds heavier than last he'd seen him, wearing a high-style suit with a cigar in the breast pocket. Berrie, a rising star in his dad's toy company, was equally stunned to see Kassalow. He was 10 pounds thinner, and full of stories about river blindness and pro bono eye surgery. Each man found himself thinking: "Damn, I wish I were him."

Twelve years later, Berrie and Kassalow are running Scojo Vision, a New York City-based company that makes reading glasses, which they founded in 1999. They sell their upscale specs to aging boomers at places like Saks Fifth Avenue--and raise money for eye care in poverty-stricken areas like Bangladesh. If Scojo succeeds, Kassalow could get rich even as he works on international health, and Berrie could merge his business ambitions with his longing to do some good.

Berrie and Kassalow look like the kind of guys you might see buying high-end furniture in a Soho boutique while lamenting rain forest destruction. But they're more than talk. They're part of a wave of business leaders who are a real departure from the dominant model. For decades, CEOs have heeded the dictate of Nobel laureate economist Milton Friedman: A company fulfills its obligation to society by creating value for shareholders, obeying the law, and paying taxes. For most companies this is still the raison d'etre--especially the part about shareholders. Philanthropy is usually an afterthought--something to do with a checkbook while watching CNBC after work.

The new breed is no less interested in profits. But they demand another kind of return as well: emotional, spiritual, or moral. They talk mission, vision, and P&L in the same breath and believe they know better how to do it all--rake it in and give it back.

Call it compassionate capitalism. While these CEOs absorbed the notions of social justice that characterized the '60s and '70s, they left behind the notion that capitalism was the enemy. "We had a certain disdain for business that was right to a large degree,'' says Mike Hannigan, co-founder of the office supply company GSB, or Give Something Back. "But we realized that the business world is where the resources are." Last year the Oakland-based company gave $1 million--57% of after-tax profits--to local community groups. "This far exceeds anything we could do in the nonprofit world," Hannigan adds.

As they like to say in new economy speak, it's win-win: good for bank accounts, good for the world. But like most things summed up in neat phrases, this one poses thorny problems. Can these companies sustain the scrutiny their righteous stance attracts? What happens when times aren't so flush and sharing the wealth becomes painful? Do these CEOs know the price of philanthropy, either in what they give up personally or in what it costs to act on their principles?

For many who believe in the double bottom line, inspiration came in 1984, when American Express promised five cents of every purchase on its charge card to the restoration of the Statue of Liberty. (FSB is produced by Time Inc. for American Express Small Business Services.) Paul Newman, with the food company he launched in 1982 on the strength of his name, pushed the idea further, giving away 100% of the profits.

Laura Scher remembers hearing about the American Express campaign as a new graduate of Harvard Business School. The child of parents who took children of low-income families on excursions every summer, Scher expected to use her MBA at a nonprofit. But she found that her skills were better suited to business; maybe she'd have more impact working through the system. Scher founded Working Assets in 1985 by offering a credit card that pledged ten cents of every purchase to progressive nonprofit groups. What has really set Working Assets apart is the way it uses the billing process. Monthly statements give information on progressive causes and offer customers opportunities to send automatic "citizen action" letters to Congress and to round up the amount of their bills, giving the balance to charity. With a long-distance telephone service, Working Assets now has 300,000 "members." And if that customer base is limited, its loyalty gives Working Assets room to grow (the company is offering new online and wireless services) and protects it from competition. When AT&T once sent "free" checks to lure potential customers, Working Assets members mailed the checks to Scher's office with messages like, "I can't be bought.'' Scher says her mission is to raise enough to donate $10 million a year to social causes. Her company now donates about $5 million on sales of $140 million.

For all its originality, Working Assets is a simpler model than some others: Social action is the draw. Customers of Give Something Back, by contrast, aren't recycled-paper lovers, but hard-nosed office workers who want their mouse pads to arrive on time. GSB woos them with discounted products and strong service. Loyalty then kicks in, says co-founder Sean Marx: "They like that we're giving back to the community."

These CEOs have faith in the free market system not only to make the business work but also to make philanthropy work. Scojo's Berrie and Kassalow, for example, are eager to be donation-free. "We don't want to be dependent on the good graces of donors," Kassalow says. "Donors are fickle. We could create a wonderful nonprofit program, but if some new, hot, and sexy issue came along, they could pull out, and our program would crumble in five years." So some of Scojo's profits will go to fund its Reader Initiative. And instead of simply donating to a program that would distribute glasses, it gives micro-loans to poor women in India to go into business selling them. If all goes well, the company will create jobs and revenues for a population desperately in need of them.

Steve Kirsch of Propel has another formula. Head of a Redwood City-based software maker, he's seen as a philanthropy guru in Silicon Valley. But philanthropy is all about pragmatism, he argues. Propel has an employee-volunteer program and a part-time ethicist, who does things like help Kirsch deal fairly with a subcontractor in a dispute. And Kirsch has earmarked 1% of the company's valuation for charity. All these features help it attract and keep talent in this tough market, says Kirsch. When Propel goes public in the next few years, he says, he plans to have a market valuation of $10 billion, making the 1% he has committed to charity worth $100 million. If that sounds hefty, Kirsch thinks it will easily be returned in productivity gains, by employees who feel good about what they do. Kirsch has a good record; he took Infoseek.com and Frame Technologies public. But if it doesn't work with Propel, he says, he'll find another way to give the money away.

In the high-tech world, at least, this view seems to attract investors. Tim Tight and Steve Lorenz are partners in Venturesurf.com, an incubator that's asking new companies to build a philanthropy program into their business plans up front. Lorenz, a man given to wearing brightly colored shirts, describes himself as a creative type. ("I'm the weakest link in the chain here," he guffaws in an interview, to the PR women's dismay.) Tight is a seasoned Valley veteran. But he too gets almost giddy when he talks about this.

"There used to be a phrase in engineering that said, 'quality is free,'" says Tight, who worked as an engineer himself before getting an MBA at Stanford. "Well, I believe that philanthropy is free. If you total up the benefits,'' he says, counting on his fingers, "in marketing, happy employees, customer retention..." Tight lifts his hands in the air. "I challenge anyone to say that somewhere in the 1% to 5% rate isn't safe. You get it back in spades." Venturesurf's investors have been extremely responsive, Tight says, and he's convinced that the difference is the philanthropic angle.

Projecting oneself as a social benefactor may seem an exercise in ego--or grandiosity. Margaret McEntire, of Little Rock, Ark., founded a $3 million franchise company that sells candy "bouquets.'' She spends about 10% of profits, or $30,000 annually, on full college tuition for employees. Now, she declares, "I'm going to save the inner cities of America. If you think I'm nuts, just try me." Her idea is to donate franchises, which usually go for $10,000, to inner-city dwellers and to get Congress to give tax breaks to other franchisors who do the same.

If these CEOs have confidence, though, they don't seem to demand the perks to match. "We're not martyrs," allows GSB's Marx. He and his partner pay themselves $96,000 a year each, and he plans to send his children to the colleges of their choice. But he says: "I'm comfortable, and I don't aspire to be more than that.''

Of course, the time may come when philanthropy is a luxury. What happens if CEOs become too busy tightening their own belts? "There will be pressure on this issue, no doubt," says Allen Grossman, a Harvard Business School lecturer. How much pressure depends on how strongly the giving instinct has been built into a company's culture, he says.

Jim Carekker, for one, claims he has done that. In 1992, Carekker invented a philanthropic formula for his six-year-old company, Aspect Communications. Planning to maintain at least an 18% operating profit, Carekker vowed to donate up to 4% of that in good times and 2% in slow times. Last year, when Aspect switched gears in its customer-service business, it had its first loss, to the tune of $28.9 million. Carekker proudly reports that the fund he'd established in 1992 allowed him to keep his promises.

There are other dangers. Chief among them is the scrutiny that philanthropic companies invite by their very nature. "People are watching," says Tight of Venturesurf. "They're waiting to say, 'I knew it couldn't be done; you should have just focused on the for-profit end of things.'" No story illustrates this better than that of Ben & Jerry's Ice Cream, whose every move was critiqued by friends as well as skeptics. Who harvests those nuts? Are all your dairies really local Vermont companies? The company once found itself shipping Vermont milk to a temporary factory in Iowa, incurring costs that would be hard to justify to your average group of shareholders. Ben & Jerry shareholders may have been more patient. But since the founders sold out to industry giant Unilever this year, the question becomes, Did Ben & Jerry's social commitment ultimately destroy it? (The founders did not return phone calls.)

The biggest issue for most of these companies is labor. It's hard enough to handle the issue when you're a company like Nike, which makes no claim to running a socially directed corporation. It's more sensitive for a company like Timberland, the New Hampshire boot maker with ad slogans that bid consumers to "pull on your boots and make a difference." In May, the National Labor Committee, a nonprofit group sponsored by private donations and religious groups, accused Timberland of using factories in China with sweatshop conditions. The company admits to "gaps" in the operations of that factory. But Cheryl Mariugh, senior manager of global business alliances for Timberland, says the company has ventures designed to make a difference in Third World countries. And she argues that the company sees no problem with paying Chinese laborers 22 cents an hour--a wage that advocates say keeps them in abject poverty--while purporting to be a socially conscious company. (Timberland CEO Jeff Swartz, who has a powerful reputation for activism, declined an interview with FSB.) This stance may not hurt Timberland. So far, the story has barely attracted any press. And while the public pays attention to such stories--especially when big brands are involved--consumers haven't demonstrated much interest in changing their shopping habits.

Still, companies' social profile may become increasingly important to sales and stock price. A study by Roper Starch Worldwide says that 66% of Americans trust companies aligned with a social issue (although they're not sure which companies those are). It's clear that traditional companies are taking this seriously. Witness the many advertisements like International Paper's, illustrating its environmental concerns. But the effort may amount to no more than an ad campaign.

Such scrutiny is only fair, says Scojo's Scott Berrie. But living up to it takes work--and an upfront investment. In November, Berrie is flying to Asia to look at Scojo's plants, and he doesn't know what he'll find. "I need to make sure the conditions don't make me a hypocrite," Berrie says, "and [that they] maintain Scojo's credibility." If he's not happy, Berrie says, he'll change manufacturers. But that's easier said than done. Even the plane ticket to Asia is no small expense for a company like Scojo.

Finally, though, these CEOs don't see their ideas as all that radical. "Every company gives away its profits,'' says GSB's Hannigan. "It's just a question of who they give them to. Most give them to stockholders. We just happen to give them away to the community."

--with Maccabee Montandon