the times | Thursday November 26 2020 1GM 43

CommentBusiness

Rule of law is central to the battle

over the EU’s budget — and more

Angela Merkel must

find a solution to

problems posed by

Poland and Hungary

T

he history of the British

computer games industry

has often resembled a real-

life version of Pac-Man. As

soon as a promising

developer ghosted into the limelight,

invariably it would end up in the

maw of a predator.

American publishers have

acquired many of the global hits

created in British games studios,

from Grand Theft Auto to Candy

Crush Saga. The Treasury offers

generous breaks to developers and

has lost out from the takeover spree.

Royalties and licensing fees that

might otherwise have been taxed in

the UK have disappeared into sandy

Caribbean havens.

Nowadays, British developers seem

to cherish their independence. The

sector is thriving and many studios

and publishers have chosen to list on

the stock market rather than seeking

a buyer. Frontier Developments,

Team17 and Codemasters each have

created hundreds of millions of

pounds of value since going public.

Well-crafted subsidies can deliver

rewards for investors and the

taxman.

But the wheel could be about to

turn again. Codemasters has agreed

a £750 million takeover by Take-Two

Interactive, the Nasdaq-listed goliath

that owns Grand Theft Auto. The

deal is flawed on every level and

benefits neither shareholders nor the

wider economy.

The Codemasters board is asking

investors to accept a mixture of cash

and Take-Two stock to relinquish

control. The price, moreover, is

highly unattractive. The American

company has offered a premium of

only 12 per cent. These are the terms

a company would accept only if it

were in distress. Yet Codemasters has

been a lockdown winner. Between

April and September, its revenues

doubled to £81 million.

So why did Codemasters cave in

when profits are booming and the

industry will be lifted by the new

generation of consoles? Charlie

Munger, Warren Buffett’s right-hand

man, has a pithy way of explaining

why corporate leaders choose one

course of action over another: “Show

me the incentive and I’ll show you

the outcome.” In the case of

Codemasters, too many of the

protagonists stand to gain from

cutting a quick deal.

Consider its three independent

directors. They are supposed to act

as fiduciaries for shareholders,

bulwarks against executives — but

the Take-Two proposal has exposed

shortcomings in governance.

Codemasters’ non-executives receive

part of their pay in share options,

which runs against best practice. The

vast majority of listed companies pay

independent directors solely in cash

for good reason. Stock options give

directors an incentive, subconscious

or otherwise, to chase short-term

returns.

There is no suggestion that

Codemasters’ independent directors

have breached their fiduciary

responsibilities in recommending the

bid. However, it is not a good look

when non-executives pocket life-

changing sums from an acquisition.

Take Lisa Thomas, who joined in

April: she is sitting on stock options

worth more than £500,000.

Normally, Ms Thomas would have

had to wait until 2023 to collect all of

the shares, but if the acquisition

proceeds, the options will vest in full

and she’ll get the full amount straight

away. Gerhard Florin, chairman, and

Ian Gomes, another non-executive

director, will make £1 million and

£600,000, respectively, from their

options. Boss Frank Sagnier, who

says the bid fully values Codemasters

and that games are becoming

increasingly expensive to develop,

will get a £17 million windfall.

What about Jefferies, its financial

advisor? The American bank will be

paid a percentage of the sale price.

Why would it push for an extra

10 per cent or 15 per cent cent, when

squeezing Take-Two might

jeopardise the transaction and a fat

fee? Like everyone else, its incentive

is to get a deal done.

Shareholders need to start

focusing on long-term rewards rather

than their annual bonus cheque.

Simon Nixon

Simon Duke

around LBGT rights and immigration.

The reality is that by their own

assaults on the independence of the

judiciary, they have undermined the

trust and democratic consent that

underpins the single market. There

seems little prospect that the other

member states will back down.

The EU’s fight with Poland and

Hungary presages a wider battle for

the soul of the West. Joe Biden,

America’s president-elect, has made it

his mission to revive the western

alliance and the rules-based

multilateral order as a counterpoint to

authoritarian regimes such as China

and Russia. But that alliance can be

sustained only on the basis of

common values. The past few years

have highlighted the vulnerability of

western political systems to populist

politicians with scant regard for that

rules-based order, often funded by the

tide of dirty money from Russia and

Asia that has poured into western

financial systems, much of it

laundered through London. That has

further undermined trust.

This is a fight that the rest of the

EU cannot afford to lose. It has learnt

over the past five years that it has no

other effective sanctions with which

to defend the integrity of its market

and maintain trust. The sole

mechanism for dealing with a country

that persistently undermines core EU

values is the nuclear option of

suspending their membership under

Article 7 of the EU Treaty. But this

requires unanimity among the other

member states, which is impossible so

long as Poland and Hungary can be

counted on to support one another.

Yet the budget also requires

unanimity and this has given Poland

and Hungary leverage.

Most observers expect Angela

Merkel, the German chancellor who

holds the present rotating presidency

of the council, to find a solution.

Poland and Hungary’s leverage may

not be so great, since, even if they

hold up the budget, the EU will still

be able to disburse some funds under

an emergency extension. Poland and

Hungary are significant beneficiaries

of EU funding, so have an interest in

the budget passing. Perhaps they will

settle for reassurance of the

circumstances under which the rule

of law conditions

might be triggered.

But the stakes could

hardly be higher,

not just for the EU.

Now that Britain

has left the

European Union, it

is easy to dismiss

the latest internal

political rows in Brussels as no longer

our concern. Yet the bust-up over the

EU’s new seven-year budget is

important. It may lack the drama of

recent events in America, but Poland

and Hungary’s threat to veto the

budget over a deal that would link

disbursements to adherence by

member states to the rule of law has

potential ramifications that extend far

beyond the EU. This is not, as

Warsaw and Budapest would have it,

a dispute about bullying Brussels’

attempt to impose its “woke” agenda.

It is about the future of western

liberal free-market capitalism.

There is far more at stake than

merely the €1.8 trillion budget itself,

although delivering this is vitally

important to the EU’s prospects of

recovering from the pandemic. The

budget may amount to only about

2 per cent of EU GDP, but that

includes the bloc’s €750 billion

coronavirus emergency recovery

scheme. This would allow the

European Commission to borrow up

to €750 billion to disburse to countries

hit hardest by the pandemic. That

money will go some way to ease the

debt burdens on countries earmarked

to benefit from the fund. More

importantly, the decision to allow the

commission to borrow has helped to

reinforce confidence in the long-term

viability of the eurozone.

But the rule of law conditions that

have provoked Warsaw and

Budapest’s ire are a crucial part of

this package. They were not an

afterthought, inserted at the

behest of leftist western

European governments. These

conditions, the result of a

compromise thrashed out at a

summit in July and since

turned into a legal text in

negotiations between the

commission, the

European Council and

the European

parliament, are the

culmination of a long-

running dispute within

the EU as to how to

safeguard its democratic values in

response to growing authoritarianism.

For many in the EU, this is an

existential issue, central to the grand

bargain that underpins the EU’s

experiment in shared sovereignty.

The pressure to create such a

mechanism emerged in response to

political developments in Hungary

and Poland. Since 2010, Viktor Orban,

the Hungarian prime minister, has

driven a series of reforms that have

systematically undermined the

independence of the judiciary,

squeezed independent media and

engaged in rampant cronyism that

has seen his close associates

accumulate vast fortunes, often

involving EU funds. Meanwhile,

immediately after taking office in

2015 the Polish government launched

its own assault on the independence

of the judiciary, illegally packing the

constitutional tribunal with its own

appointees, which then in turn

rubber-stamped a series of

constitutionally dubious reforms.

EU member states have had every

right to be alarmed by these

developments. As many in Britain

have learnt since Brexit, the EU is

first and foremost a body of common

laws. As such, it can function only if

all member states respect the rule of

law. Indeed, the rule of law is

essential to any functioning market

economy. Participants in the EU’s

single market, as in any market, need

to know that rules will be respected,

contracts enforced and disputes

resolved fairly by independent judges.

Markets rely above all else on trust, as

do political systems when they

dispense large quantities of money.

Taxpayers need to know that the

money will be spent properly, or

consent will be withdrawn.

The move by the Polish and

Hungarian prime ministers to

liken the attempts by other EU

member states to attach rule of

law conditions to EU

disbursements, to which

they agreed in principle

in July, to the return of

the Soviet Union is

patently absurd. So,

too, is their attempt

for domestic

consumption to

portray the rule of

law conditionality

as a ruse for

Brussels to wage a

culture war based

‘‘

’’

Simon Duke is Technology Business

Editor of The Times

Flawed Codemasters

deal shows the need for

a long-term game plan

Codemasters

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