Quality-based governance and financial performance: The mediating role of employee cost efficiency in emerging markets

Corporate governance has evolved beyond oversight and compliance to function as a system of quality management that enhances efficiency and long-term performance. This study examines how governance structures affect financial performance through the mediating role of cost of employee (COE)—a measure of human capital efficiency reflecting the quality of internal management processes. Integrating agency theory, resource-based view (RBV), and the quality management perspective, the study posits that board effectiveness lies not in its formal composition, but in its ability to foster quality-driven internal efficiency. Using panel data from 600 non-financial firms listed on the Indonesia Stock Exchange from 2015 to 2023, the analysis applies Rockwood and Hayes’ PROCESS Macro Model 4 to test whether board size, gender diversity, and board independence influence return on equity (ROE) through COE. Results reveal that COE significantly mediates the relationship between board size and ROE, partially mediates the relationship between independent commissioners and ROE, while the mediation of women on boards is insignificant. These findings demonstrate that governance effectiveness in emerging markets operates primarily through quality-based internal efficiency. The study contributes by introducing COE as a quality-oriented efficiency mechanism that bridges governance and financial performance.