Leadership Competency and Sustainable Performance in Emerging Markets: A Dual-Pathway Perspective

Leadership competency is critical for sustainable organizational performance, yet the mechanisms driving this relationship in high power distance (HPD) emerging markets remain underexplored. Western-centric models predominantly emphasize employee engagement, often overlooking contextual institutional and cultural pathways. This study tests a dual-pathway model wherein leadership competency influences sustainable performance via psychological activation (employee engagement) and institutional embedding (organizational culture). Three-wave, multi-source data were collected from 215 leadership units in Ethiopia’s commercial banking sector and analyzed using structural equation modeling (5000 bootstrap resamples) and dominance analysis. Results reveal statistically significant but modest indirect effects. Among the two mediators, the institutional pathway (organizational culture) transmits approximately twice the relative influence of the psychological pathway (employee engagement): 24.8% versus 11.1% of total effect (β = 0.058, 95% CI [0.014, 0.109] versus β = 0.026, 95% CI [0.010, 0.046]). Dominance analysis, computed over the two mediators only, indicates culture’s greater relative explanatory weight (68.2% versus 31.8%, p = 0.003). However, leadership competency retains a substantial direct effect (64.1% of total effect), meaning the dual pathways collectively account for only 35.9% of leadership’s total influence. A robustness test using archival performance data alone yields a smaller but directionally consistent institutional indirect effect (β = 0.041, 95% CI [0.009, 0.078]), while the psychological pathway becomes non-significant, suggesting that the institutional route is robust but modest once perceptual common-source variance is removed. These findings contextualize engagement-dominant Western models by demonstrating that cultural embedding operates as a relatively stronger mediator in HPD settings. The modest absolute mediation effects and persistent direct path highlight the need for context-sensitive leadership development and suggest that additional institutional or capability-driven mechanisms warrant future investigation.