Activities of the Board of Directors

During the year the Board:

  • approved a “new” Three-Year Industrial Plan (2011/2013, 2015 vision),
  • approved the Procedure for Transactions with Related Parties
  • approved the "new" long term incentives plan referred to as LTI 2011/2013
  • authorised the issuing of a bonded loan

The Board of Directors met 5 times during the year, for an average of two and a half hours each time; meetings were on average attended by 84% of all Directors, and 93% of Independent Directors. The Lead Independent Director attended all meetings of the Committee for Internal Control, Risks and Corporate Governance (which he chairs) and all Board of Directors' meetings.
1 Board meeting has been held during 2010, up to the Date of the Report.

Evaluation of the general results of operations22 and strategic plans

In accordance with the law23 and the Company Bylaws24, the Board of Directors evaluated the general results of operations and their predictable future evolution at least once every quarter.
During the year the Board:

  • approved periodic financial reports (draft financial report for 2009; intermediate reports on operations in the first and third quarter of 2010 and half-yearly financial report on the first half of 2010). The Board received information on results achieved, comparing them with: (i) historical data; (ii) the goals of the budget, with a focus on any deviation, also in order to constantly assess impact in relation to strategic or planned goals and/or forecasts for subsequent financial periods; with general trends in the sector and in peers for benchmarking purposes.
    When examining the draft financial statements, the Board of Directors also took into consideration, as required by the joint Banca d'Italia/Consob/ISVAP document of 4 March 2010, "information on impairment tests to be provided in financial reports".
    The Board therefore approved the impairment test procedure. For more information on this topic the reader is referred to the supplementary notes to the financial report.
  • outlined the 2010 Management Plan and raised the targets announced to the market three times in view of positive trends in the Group.

In November 2010 the Board of Directors acknowledged that the efficacy of actions performed on the basis of the 2009-2011 industrial plan allowed it to achieve its targets for 2011 under the previous industrial plan one year in advance and approved a "new" Three-Year Industrial Plan (2011/2013, 2015 vision), announced to the financial community in Milan on 4 November 2010 and in New York on 8 November 2010; the Company's website contains the presentations prepared for the financial community.

Internal control system and governance system25

The Board of Directors assessed the adequacy of the internal control system and, more generally, the governance of the Company and the Group it controls at six monthly intervals.

On the topic of review of governance tools and adaptation to new legislation, the Board has approved a number of changes to the Company Bylaws aimed at adapting them to the provisions introduced by Legislative Decree 27/2010 implementing in Italian law Directive 2007/36/ CE, aimed at facilitating participation in Shareholders' Meetings of shareholders in listed companies, and Legislative Decree 39/2010 regarding implementation of Directive 2006/43/CE concerning legal auditing of statutory and consolidated accounts.

The Shareholders' Meeting called to approve the 2010 Financial Reports will be asked to consider additional changes implementing in the Company Bylaws some of the powers granted under Legislative Decree 27/2010 to further facilitate shareholders' exercise of their right to attend meetings and vote, even if they live abroad. The reader is referred to the Management Report for information on the changes to the Company Bylaws, published on its website.

Moreover, the Board approved a number of changes to the Group's Policy to complete it with new considerations which were already concretely implemented but are now expressly addressed in the updated Policy. The updated Policy may be found on the Company's website, along with the Code of Ethics of the Pirelli Group. The reader is referred to the Code of Ethics, Policy and Organisational Model 231.

During the year the Board approved the Procedure for Transactions with Related Parties, also in order to implement Consob's 2010 regulations. For more information on the "new" Procedure for Transactions with Related Parties the reader is referred to the Directors' Interests and Transactions with Related Parties Section.

During the year the Board replaced Deputy Chairman Puri Negri, who had resigned, in accordance with article 2386 of the Civil Code, appointing Vittorio Malacalza to replace him, and decided to put all decisions consequent upon the death of Prof. Libonati (on 30 November 2010) to the Shareholders' Meeting in view of the imminent expiration of the entire Board's term of office. Moreover, the Board identified Maurizio Sala as one of the directors with strategic responsibility for the Company in view of his tasks and powers and his contribution to preparation of the 2011/2013 Industrial Plan and future contribution to its implementation.

The Board discussed the latest developments in the lawsuit involving former employees of the Security Department, which has been kept under constant scrutiny by the Board of Directors and the Committee for Internal Control, Risks and Corporate Governance, along with the Board of Statutory Auditors and the Supervisory Body. As in the reports on corporate governance in the years 2006, 2007, 2008 and 2009, we shall report on this lawsuit in this Report.

As already noted in the 2009 Corporate Governance Report, the Board, the Board, in response to the proposal made by the Committee for Internal Control, Risks and Corporate Governance, aided by highly qualified professionals, carefully weighed and approved the decision to file a demand for application of the sentence on request of the parties, having reached an agreement with the Public Administrations involved for complete definition of all forms of responsibility.

The Procura (Criminal Court) has expressed its approval of the Company's demand and the Judge in the Preliminary Hearing pronounced a decision in favour of a "plea bargain" with a sentence that has become res iudicata.

The Board was also informed of the sentence pronounced by the Judge in the Preliminary Hearing regarding the other accused, and particularly the pronouncement of acquittal in relation to the accusation of embezzlement of Company funds by its former employees, in relation to which the Company is a civil claimant.
The Board of Directors acknowledges that the acquittal has been appealed by the Public Prosecutor in the Court of Appeal.
The Company has filed its own appeal in relation to those defendants who did not file a plea-bargain, but could not appeal the pronouncement of acquittal for the other defendants (including the former Company employees) as this is not permitted under current penal court proceedings.

The Company is continuing the civil lawsuits filed against the suppliers of security services involved in the investigations with the aim of obtaining repayment of amounts paid for services which have been acknowledged as not provided or as being illegal.

The Board has been informed of the news appearing in the press regarding the alleged responsibility of former company managers and notably the Board's former Chairman, now the Company's Chairman and majority shareholder, discrediting this person and damaging the Company's image. The Board confirmed its faith in its Chairman and resolved to take all measures necessary to defend the Company's interests.

Finally, note that in its 8 March 2011 meeting, agreeing with the considerations of the Committee for Internal Control, Risks and Corporate Governance, the Board of Directors proceeded to evaluate the company's overall organisational, administrative and accounting set-up and expressed a positive opinion of the Company's internal control system and the corporate governance system used in the Company and the Group in general26.

22 Self Regulatory Code: Criterion of application 1.C.1., lett. e).
23 Article 150 CFL.
24 Article 11 of the Company Bylaws.
25 Self Regulatory Code: Criterion of application 1.C.1., lett. b).
26 In this regard the reader is referred to the next section, "Committee for Internal Control, Risks and Corporate Governance".

Remuneration of directors invested with particular offices27

During the year the Board examined and approved, in response to the Remuneration Committee's proposal, proposals for the incentives plan for Directors invested with particular offices to whom specific powers have been delegated and Executives with strategic responsibilities and verification and reporting on incentives and annual targets for 2009.

On the occasion of the "launch" of the new Industrial Plan, the Board defined a "new" long term incentive plan (referred to as the 2011/2013 Long Term Incentive Plan) to "support" achievement of the targets in the "new" Industrial Plan.

Lastly, in its 8 March 2011 meeting the Board approved the Remuneration Committee's proposal regarding the General Remuneration Policy submitted to the advisory vote of the Shareholders' Meeting called to approve the 2010 financial reports and the Report for the year 2010. For more information on issues relating to remuneration, the reader is referred to the "Remuneration Policy" section and to the Report, which appears at the end of this Report.

Transactions with a significant impact on the strategy, profitability, assets or financial position of the Company28

The Board, while retaining its powers and responsibilities under the law and the Company Bylaws and its structure of powers and internal procedures, has determined that the Board of Directors has the power to approve in advance a number of deeds and transactions not within the group (determined on the basis of qualitative criteria and quantitative thresholds) when performed by Pirelli & C. or by Italian or foreign companies which are not listed on the stock exchange and are subject to the direction and coordination of Pirelli & C.29.

In this regard, the Board of Directors approved the principal transactions conducted during the Financial Year. The Board examined and approved the plan for separation of the real estate sector (Pirelli RE) from the Pirelli Group. The Board found that the separate of Pirelli RE falls within the context of the management rationalisation and optimization measures adopted in 2008, which continued throughout 2009, as well as during the strategic course outlined with the three-year 2009-2011 industrial plan focusing on core industrial activities in the tyres sector.

The operation resulted in separation of the activities performed by Pirelli RE from others performed by the Pirelli Group in order to focus the Company's activities on the tyre sector and permit Company shareholders who already indirectly own shares in the Real Estate business to become direct owners of Pirelli RE shares.

The Board of Directors considered that the Pirelli Group concentrated a variety of different activities in its corporate structure, already handled separately by Pirelli & C. and Pirelli RE, limiting the Pirelli Group's strategic and financial flexibility, especially in the tyre business, and that this was not appreciated by the market, which prefers to see separation of activities in different market sectors. By separating the activities performed by Pirelli RE, the Board completed the process of focusing on core industrial activities in the tyres industry.

The Board therefore approved a new five-year revolving line of credit totalling 1.2 billion euro destined to replace the existing lines of credit; the new line of credit is one of the actions aimed at optimising the structure of the company's debts by lengthening the average term of the debt and diversifying sources of financing.

The Board also considered transfer of the entire share capital of Pirelli Broadband Solutions, also in the context of its declared strategy of focusing on Pirelli's core business in Tyres.

The Board of Directors also authorised the issuing of a bonded loan for subscription exclusively by qualified investors in order to optimise the group's debt structure through diversification of sources of financing and the average term of loans. Specifically, the Board approved the issuing of non-convertible bonds up to a maximum face value of 800 million euro, to be sold, possibly in multiple instalments, on the Eurobond market and listed on the stock exchange in Luxemburg or another regulated market. In implementation of the above, in February 2011 Pirelli & C. offered international institutional investors a bonded loan with a total face value of 500 million euro30.
Lastly, the Board of Directors discussed Pirelli's return to Formula 1 as exclusive tyre supplier and its launch on the Russian market.

The Board discussed the agreement reached between Pirelli, Russian Technologies and Sibur Holding to come up with an agreement for development of joint activities in the sectors of tyres, steel cord and the supply and hightech production of synthetic rubber products in Russia. The agreement lays the foundations for jointly beginning a process of rationalisation and reorganisation of tyre activities under Sibur Holding, one of Russia's biggest petrochemical groups. The agreements provide for a reorganisation process aimed at selecting Sibur Russian Tyres asset to be conferred on two joint ventures established by Pirelli and Russian Technologies. The selection will be made on the basis of guidelines and business plans shared by the three partners. The agreement will help create synergies between the automotive sector, the tyre sector and the synthetic rubber sector in Russia, improving the supplies available to customers and the international competitiveness of Russia's tyre and automotive industries.

The partnership between Russian Technologies, Sibur and Pirelli will also support growth in the Russian automotive and tyre industries and attract new investment to the tyre sector, permitting production of high-tech, high quality, modern products for both industries. The agreement will allow Pirelli to have its own plants in the Russian Federation.

Finally, also note that the "procedure regarding information flows to Directors and Auditors"31 requires general information on the activities performed to be completed with specific detailed information, also including operations with a significant impact on the profitability, assets or financial position of the Company.

27 Self Regulatory Code: Criterion of application 1.C.1., lett. d).
28 Self Regulatory Code: Criterion of application 1.C.1., lett. f).
29 In this regard the reader is referred to the "General criteria for identification of transactions with a significant impact on the strategy, profitability, assets or financial position of the Company" appearing in an up-to-date version on the Company's website and at the end of this Report.
30 See 10 February 2011 press release for more details of the issue.
31 The "procedure regarding information flows to Directors and Auditors" appears at the end of this Report and is available in the Governance section of the Company's website.

Transactions with related parties

For information on transactions with related parties, the reader is referred to the section on "Directors' interests and transactions with related parties".

Board performance evaluation

Since 2006 the Board of Directors has performed a selfevaluation of its performance (referred to as a "Board performance evaluation"), thus adhering to international best practice and implementing the recommendations contained in the Self-Regulatory Code32.

In 2010, in response to the proposal of the Committee for Internal Control, Risks and Corporate Governance and in view of the positive experience of the previous years, the Board confirmed the structure of the self-evaluation process used in the past.

The self-evaluation process was conducted with the aid of a prominent consulting firm (Spencer Stuart) which assisted the Committee for Internal Control, Risks and Corporate Governance in preparation of the evaluation methods and reporting on the results.

In line with the most widely tested practice, the selfevaluation process was implemented through direct interviews with individual Board members or, alternatively, allowing Board members to provide written answers to a specific questionnaire (which was also used as a guide for the interviews).

Considering the good results that had emerged from the preceding self-evaluations, the changes in organisation and governance and the expiration of the Board's term of office with the approval of the 2010 Financial Reports, the Board decided to:

  • further simplify and streamline a number of aspects which are not expected to produce any further useful information to be brought to the Board's attention;
  • study how Board decisions are made; the Committees' analysis focuses in particular on the following issues characterising the year 2010:
    • the process of separation of Pirelli RE (Prelios) from the Pirelli Group
    • the Company's crisis management
    • risk evaluation and monitoring
  • analyse the efficacy of the division of tasks among the Board and the Committees in order to determine the level of satisfaction and collect any possible suggestions as to how to improve all Directors' involvement in their work;
  • promote reflection on the role and function of Independent Directors by the Board;
  • ensure continuity of self-evaluation by bringing to the Directors' attention a number of issues which emerged during the last year's self-evaluation and checking on the improvements implemented.

The questionnaire included the following sections:

  • "corporate governance" section in which Directors are asked to make general qualitative comments on the Company's Corporate Governance, identifying strong points and areas requiring improvement;
  • "Board and Company" section aimed at determining how Directors perceive (i) effective exercise of powers of guidance and control by the Board in relation to Company organisation and business in general, with a specific focus on the principal operations performed during the year (i.e. separation of the real estate sector, reaction to the effects of world-wide financial crisis, evaluation and monitoring of the risk governance system); (ii) handling of situations involving a potential conflict of interest; (iii) perception of the role and activities of independent directors in general and specifically of the Lead Independent Director; (iv) the adequacy of the Board's composition, in terms of the mix of skills present;
  • "Committees" section for understanding how Directors (separately Committee members) perceive the role and efficacy of the Committees set up within the Board;
  • "Directors" section for determining how Directors' concrete activities are perceived;
  • "Self-evaluation process" section for determining whether the Directors think the comments and proposals emerging from the previous year's self-evaluation have been translated into concrete programmes which have been implemented.

The Directors interviews were asked to express a judgement on four levels and offer any comments they may have. The results were analysed in depth by the Committee for Internal Control, Risks and Corporate Governance and then submitted to the Board of Directors in its meeting on 8 March 2011.

The self-evaluation confirmed the strong points noted in previous self-evaluations. It was specifically noted that the Board's members offered a high professional, managerial and academic level. In addition, the majority of Directors stated that the Board exercised its powers of guidance and control in a way that was more than adequate.

The Directors confirmed the evaluation of appreciation of the working meetings they had with top management to examine in depth certain specific business issues, confirming the importance of repeating what has become a consolidated, profitable practice.

The Board expressed its special appreciation of the work of the Committees, and particularly the Committee for Internal Control, Risks and Corporate Governance, and for of the role played by the Lead Independent Director, considered an effective facilitator of reporting for all the Independent Directors.

On the Board's role in the principal operations performed in the year, it is reported that the Board was completely involved in the analysis and decisions made in relation to the separation of Prelios (rectius: Pirelli RE) from the Pirelli Group.

Similarly, they expressed a positive opinion of the way in which the Board dealt with crisis in world economies. The Directors particularly appreciated the Board's promptness, efficacy and involvement in key strategic and organisational decisions.

Lastly, they confirmed last year's positive judgement of "risk governance" solutions, suggesting more direct involvement of individual Board members. It was suggested that in 2011 it would be a good idea to assess the efficacy of the Company's quantitative analytic apparatus.

Directors offered a number of suggestions for further improvement of Board dynamics, underlining the importance of active participation of all Directors in individual meetings. They noted the importance of maintaining the Board's role as the place for discussion of the Group's most important strategic choices, also through assessment of different alternatives.

Lastly, in view of the imminent end of the Board of Directors' term, it was suggested that following the renewal of the Board, "induction" sessions might be held to further reinforce the knowledge of the Directors (both newly elected and already in office) of the activities, organisation and strategic positioning of the Company and the Group.

Article 2390 of the Civil Code

The last subsection of article 10 of the Bylaws provides that, unless otherwise deliberated by the Shareholders' Meeting, the Directors are not bound by the competition prohibition contained in article 2390 of the Civil Code.

32 Self-Regulatory Code: Criterion of application 1.C.1., lett. g).