Responsible Leadership and Organizational Agility in Enhancing Organizational Performance through Psychological Safety and Employee Engagement

Abstract

Micro, Small, and Medium Enterprises (MSMEs) are increasingly required to sustain performance in dynamic and uncertain environments; however, existing studies often emphasize structural capabilities such as leadership and organizational agility without sufficiently explaining the psychological mechanisms through which these factors translate into performance outcomes. Addressing this gap, the present study examines how Responsible Leadership and Organizational Agility influence Organizational Performance through the mediating roles of Psychological Safety and Employee Engagement within the framework of Dynamic Capabilities Theory. Using a quantitative explanatory design, data were collected from 155 MSME owners and employees in the food, creative, and manufacturing sectors in Jember Regency through a six-point Likert-scale questionnaire and analyzed using SEM-PLS with SmartPLS 4. The results indicate that Organizational Agility and Employee Engagement have significant positive effects on Organizational Performance, while Responsible Leadership does not directly affect performance but significantly enhances Psychological Safety and Employee Engagement. Furthermore, Psychological Safety does not exhibit a significant direct effect on performance, suggesting its role as an enabling condition rather than a primary driver, whereas Employee Engagement emerges as the strongest predictor of performance. These findings extend the application of Dynamic Capabilities Theory by demonstrating that organizational capabilities and leadership practices require psychological and behavioral pathways particularly employee engagement to effectively generate performance outcomes. Consequently, this study highlights the importance of integrating ethical leadership, adaptive capability, and employee-centered psychological processes in strengthening sustainable MSME performance.