The Mortgage on Ownership: Enforcement Gaps in Institutional Investment Governance

Institutional investors incur substantial and recurring costs to maintain ownership of global portfolios — management fees, custody, compliance, advisory services, and operational infrastructure. These costs are actively monitored and optimized. By contrast, the systematic exercise of the legal and contractual rights associated with those holdings remains underdeveloped. The result is a structural asymmetry: institutions pay the full cost of ownership, but often underinvest in enforcing the rights that ownership confers.

Ownership Without Enforcement

The active-versus-passive debate has largely focused on returns and fees. Active strategies justify higher costs through alpha generation, while passive strategies emphasize efficiency and diversification. Both approaches, however, treat ownership primarily as an allocative function.

This overlooks a more fundamental dimension: ownership is defined not only by what is held, but by whether the rights attached to those holdings are exercised. These rights include participation in securities class actions and collective redress mechanisms; enforcement of contractual provisions in investment mandates and limited partnership agreements; governance rights such as voting and objection mechanisms; and access to underlying information and records. While these rights are widely recognized, they are not consistently exercised. Claims go unfiled, contractual provisions go untested, and governance rights are invoked selectively. Ownership persists in form, but not fully in practice.

The Economics of Inaction

The consequences of under-enforcement are measurable. Across securities class actions and other recovery mechanisms, participation rates among institutional investors remain uneven. Unclaimed recoveries are redistributed to more active participants, allocated to alternative uses, or in some cases revert to defendants. Institutions that do not enforce their rights effectively absorb losses that could have been mitigated.

The constraint is not primarily legal complexity or cost. Claims monitoring and filing can be outsourced at relatively low operational burden. The barrier is institutional: rights enforcement is not embedded as a core function of ownership. This gap has broader implications. When enforcement is inconsistent, it affects how counterparties behave

A Fee Calibration Dynamic

Market participants do not set terms in isolation. They respond to the expected level of scrutiny and enforcement by asset owners. Where enforcement is limited, the expected cost of marginal deviations declines. Regulatory experience in private markets illustrates this dynamic. Supervisory authorities have repeatedly identified issues relating to fees, expenses, and conflicts of interest. Enforcement actions have addressed specific practices, yet similar issues continue to arise. This persistence reflects not only regulatory limitations, but also the behaviour of investors themselves.

Where asset owners do not systematically audit, challenge, or escalate, counterparties adjust accordingly. Fee structures, disclosure practices, and expense allocations expand into the space created by under-enforcement. Over time, this produces a form of fee calibration: practices evolve in response to the level of enforcement they encounter.

Governance outcomes, in this sense, are shaped not only by formal rules, but by how consistently those rules are enforced in practice.

Structural Constraints on Enforcement

A common explanation for limited enforcement is relational. Asset owners may hesitate to challenge managers due to concerns about future allocations, co-investment opportunities, or access to information.

However, these constraints are not incidental. They are embedded in the structure of investment relationships. Contracts define economic terms, but often provide limited procedural guidance on how rights should be exercised. At the same time, the costs of enforcement—whether relational, reputational, or organizational—are borne directly by the asset owner. The exercise of rights is therefore legally permissible but practically disincentivized.

This pattern can give the appearance of coordination across market participants. In practice, it reflects shared incentives and constraints that produce consistent non-enforcement without requiring explicit alignment.

Lessons from Property Law

Property law offers a useful perspective on these dynamics. Under the doctrine of adverse possession, ownership can be affected by the failure to assert rights over time. While the institutional context differs, the underlying principle is instructive: ownership entails not only formal title, but also the exercise of associated rights.

A related analogy can be drawn from the Party Wall etc. Act 1996 (England and Wales), which establishes a procedural framework governing actions that affect shared structures. The Act requires notice, defines response periods, and provides for structured dispute resolution. Importantly, inaction does not constitute consent; it triggers a process.

No comparable procedural framework exists in institutional investment. Actions affecting investor economics—such as fee adjustments or expense allocations—do not automatically initiate structured review. Instead, enforcement depends on discretionary action by the investor.

Toward Systematic Enforcement

Addressing this asymmetry does not require a fundamental redesign of investment models. Rather, it involves integrating rights enforcement into the operational definition of ownership. Practical measures include establishing systematic processes for tracking claims and contractual rights; separating enforcement decisions from investment allocation to reduce relational bias; defining criteria for pursuing or assigning claims; and aligning enforcement capabilities with the global scope of institutional portfolios. These steps are incremental, but they shift ownership from a predominantly allocative function to one that incorporates enforcement as a core component.

Conclusion

Institutional investors are often described as universal owners. Their scale and reach are substantial, but ownership is not defined solely by cost, scale, or title. It is defined by conduct. Persistent under-enforcement of rights has implications that extend beyond individual institutions. It influences fee structures, governance practices, and market behaviour more broadly. In this sense, the absence of enforcement is not neutral; it is a determinant of outcomes.

The costs of ownership are already incurred. The rights associated with ownership are already established. The remaining question is whether those rights are exercised systematically. In markets, as in property, what is not asserted is not effectively owned.

Baraa Shaheen is the founder and managing partner of Balwara.