Malaysia is a tropical country blessed with abundant rainfall throughout the year. However, the country experiencing water crisis due to ineffective water management, climate change, urbanization, population growth, and pollution. Sustainable water resource management relies on effective governance and stakeholders’ participation in decision making. The paper investigates the effect of institutions and governance approach on the effective freshwater management in Sabah State of East Malaysia. The data for this study was obtained through self-administered structured questionnaire from 315 selected employees responsible for managing river water resources in the Sabah region. The study employed the Structural Equation Modeling (SEM) tool for data analysis through the Partial Least Squares (PLS) approach. The study's finding indicate that the role of institutional engagement, governance factors and environmental quality are significant factors for sustainable water management in the study area. The study demonstrates that institutions’ participation and effective coordination play an important role for effective freshwater management in Malaysia. The results suggest that freshwater management activities should be coordinated with other relevant agencies and local users to achieve sustainable management of water resources. There is a need to give priority to encourage local institutions and water user participation in decision making for water management in the future resource conservation policy in Malaysia. While environmental quality remains an important contextual factor, governance effectiveness ultimately depends on how institutions and stakeholders interact, cooperate, and implement policies. The findings provide a roadmap for policymakers, practitioners to build more resilient, transparent, and inclusive water governance systems that can address current challenges and secure sustainable water resources for future generations.