Ethical Leadership, Governance Reform, and Merit-Based Appraisal: A Conceptual Analysis in State-Owned Agencies

HRMARS - This study aims to examine the relationship between ethical leadership and merit-based performance appraisal in the governance framework of state-owned agencies in Sabah, Malaysia. SOAs function in a political situation where there are frequent interferences, and the ‘multiple principal problem’, namely, that government-linked companies must answer to several superiors, is part of the key characteristics of the SOAs (Suffian, 2024). Hence, the main idea for this research is derived from existing problems related to governance in Sabah, wherein 90% of SOAs fail to pay dividends. This demonstrates a large issue with political individuals often being appointed and the SOAs not performing well. The examination of how leaders perform extends beyond standard HR practices, which is highly important to determine how the SOAs are governed. Using a combination of concepts, the current study demonstrates three aspects as the basis for improving the entire system, namely, the ways that ethical leaders create relationships that will be imitated by subordinates, evaluations based on how individuals perform as a way of understanding fairness in organisations, and reinforcing responsibility in the organisations as a key aspect for leaders to be perceived as legitimate. By using the social learning theory, agency theory, and organisational justice theory, the current study offers a model integrating multiple concepts, which considers ethical rules as a “moral compass” for dealing with political favouritism, yet also accepts that politics will continue its influential roles without being fully avoided. The main objective is to reduce the level of political influence in high-level appointments by using clearer performance review systems, which is a key task for SOAs in Sabah to regain and sustain public trust over time. This study contributes to governance literature by presenting a context-sensitive conceptual model that integrates ethical leadership into formal performance appraisal systems. The findings offer practical ways to enhance accountability, limit political interference, and strengthen institutional trust in state-owned agencies.