Calling for the power and influence of the group of 54 countries to be reinvigorated, the foreign secretary said the Commonwealth faced a series of serious questions over its future.
It could either continue to "tread softly" and slowly become obsolete or take a leading role in trade and diplomacy, he said.
In a speech given during a two-day visit to Australia, Mr Hague outlined the stark choices that the Commonwealth must make.
Mr Hague said he hoped the Commonwealth would play a greater role in shaping the future of Zimbabwe, but "therin lies a real choice".
"Will it make the leap necessary to live up to its ideals fully, make a greater contribution to its citizens and have a bigger impact on world affairs, or will it continue to tread softly?" he said.
"And can the Commonwealth expect to live up to the hopes and expectations of its young people and remain relevant as an organisation unless it does so, without sliding into irrelevance in their eyes?"
Mr Hague said Britain hoped the group would embrace the necessary reforms and take a bolder approach to "make the most of the immense potential this organisation has".
During his visit to Australia - the first time in almost 20 years that a British foreign secretary has visited the country - Mr Hague has also pledged to renew ties with Canberra and warned that Britain was "consciously shifting" its diplomatic focus to the economic economies Latin America, the Gulf and of Asia, long neglected by the previous government.
