Board of statutory auditors

The Board of Statutory Auditors is entrusted with monitoring the following:

  • compliance with the law and the By laws;
  • respect for the rules of correct administration;
  • the adequacy of the organisational structure of the Company for the aspects within its sphere of competence;
  • the ways in which the corporate governance rules specified in the codes of conduct prepared by the companies that manage regulated markets or professional associations;
  • the adequacy of the instructions issued by the Company to its subsidiaries regarding the reporting of price sensitive information.

According to the law and the Company Bylaws, the Board of Statutory Auditors is entrusted with monitoring the following:

  • compliance with the law and the Bylaws;
  • respect for the rules of correct administration;
  • the adequacy of the organisational structure of the Company for the aspects within its sphere of competence, of the internal control and administrationaccounting system, and of the reliability of the latter to correctly represent the operating results;
  • the ways in which the corporate governance rules specified in the codes of conduct prepared by the companies that manage regulated markets or professional associations, which the company declares it follows, are actually implemented;
  • the adequacy of the instructions issued by the Company to its subsidiaries regarding the reporting of price sensitive information62.

Following the entry into force of Legislative Decree 39/2010, in listed companies the Board of Statutory Auditors monitors:

  1. the financial reporting process;
  2. the efficacy of the internal control system, the internal auditing system where applicable, and the risk management system;
  3. legal auditing of the annual accounts and consolidated accounts;
  4. the independence of the legal auditor or external auditor, particularly in relation to the providing of services other than auditing by the organisation acting as auditor.

The Board of Statutory Auditors carries out its duties by exercising all of the powers conferred upon it by law and can rely on a constant and analytical information flow from the Company, during and beyond the regular meetings of the Board of Directors and its Committees. In fulfilling its functions, the Board of Statutory Auditors, besides participating in all the Board of Directors and Shareholders' Meetings, also takes part in the tasks of the Remuneration Committee and the Committee for Internal Control, Risks and Corporate Governance. Moreover, Paolo Domenico Sfameni, a Standing Auditor, became a member of the Supervisory Body in accordance with Legislative Decree no. 231/2001.

Appointment of Auditors

The Bylaws state that the Board of Auditors consists of three Standing Auditors and two Alternate Auditors. In order to permit minority shareholders to elect one Standing Auditor and one Alternate Auditor, the Bylaws state that they will be appointed by the slate system, under which one Standing Auditor and one Alternate Auditor are taken from the slate with the second to most votes (the minority slate). The remaining members of the Board (two Standing Auditors and one Alternate Auditor) are taken from the slate with the most votes (the majority slate).

Shareholders who, alone or together with other shareholders, represent at least 1.5% of the shares with voting rights in the ordinary shareholders' meetings or a smaller percentage, according to the regulations issued by Consob63, shall be entitled to submit slates.

Slates must be filed in the company's offices at least 25 days before the date of the Shareholders' Meeting called to discuss the point, unless extended under the applicable legislation. In this regard, while readers are referred to the current legislation for more information64, note that in the case of presentation of a single slate or multiple slates presented by shareholders who are related, slates may be presented until the fifth day after the deadline for presentation of slates (25 days prior to the Meeting), and the thresholds for presentation are reduced by half.

Each shareholder may present or participate in presentation of only one slate.

The following must be provided with the slates, also in accordance with current legislation:

  •  information on the identity of the shareholders who presented the slates, indicating the percentage of shares owned and certifying that they are the owners of the shares;
  • a declaration by shareholders who do not hold a controlling or relative majority share, singly or jointly, stating that they are not connected;
  • a description of the professional career experience of the designated parties and declarations in which individual candidates accept their candidacy and attest, under their own liability, that there are no grounds for their ineligibility or incompatibility, and that they meet the requirements prescribed by law and by the Company Bylaws for the office.

Any slates submitted without complying with the foregoing provisions shall be disregarded.
Each candidate may appear on only one slate, on pain of ineligibility.

The slates shall be divided into two sections: one for candidates for the position of standing auditor and one for candidates for the position of alternate auditor. The first candidate listed in each section must be selected from among the persons enrolled in the Register of Auditors who have worked on statutory audits for a period of no less than three years. Each person entitled to vote may vote for only one slate.

The chair of the Board of Statutory Auditors shall pertain to the standing member listed as the first candidate on the minority slate, if presented.

The position of a standing auditor which falls vacant due to his or her death, forfeiture or resignation shall be filled by the alternate auditor chosen from the same slate as the former. In the event of the replacement of the Chairman of the Board of Statutory Auditors, the chair shall pertain to the other standing auditor from the same slate as the former Chairman; if it proves impossible to effect substitutions and replacements under the foregoing procedures, a Shareholders' Meeting shall be called to complete the Board of Statutory Auditors, which shall adopt resolutions by relative majority vote.

When the Shareholders' Meeting is required to appoint the standing and/or alternate members needed to complete the Board of Statutory Auditors, it shall proceed as follows: if auditors elected from the majority slate have to be replaced, the appointment shall be made by relative majority vote without slate constraints; if, however, auditors elected from the minority slate have to be replaced, the Shareholders' Meeting shall replace them by relative majority vote, selecting them where possible from amongst the candidates listed on the slate on which the auditor to be replaced appeared. The principle of necessary representation of minorities shall be considered complied with in the event of appointment of Statutory Auditors nominated before in the minority slate or in slates other than the one which obtained the highest number of votes in the context of the appointment of the Board of Auditors. In case only one slate has been presented, the Shareholders' Meeting shall vote on it; if the slate obtains the relative majority, the candidates listed in the respective section shall be appointed to the office of standing auditors and alternate auditors; the candidate listed at the first place in the slate shall be appointed as Chairman of the Board of Statutory Auditors. When appointing auditors who, for whatsoever reason, were not appointed under the procedure established herein, the Shareholders' Meeting shall vote on the basis of the majorities required by law.

Outgoing members of the Board of Statutory Auditors may be re-elected to office. Meetings of the Board of Statutory Auditors may, if the Chairman or whoever acts in his/her stead verifies the necessity, be attended by means of telecommunications systems that permit all attendees to participate in the discussion and obtain information on an equal basis.

62 Now referred to as "sensitive information" (article 114 of the CFL).
63 CONSOB (CONSOB Deliberation no. 17633 of 26 January 2011) identified the percentage of shares owned required to present slates of candidates for the election of Pirelli & C.'s administration and control bodies in 2011 at 1.5 percent of share capital with voting rights in ordinary shareholders' meetings.
64 Issuers' Regulations: article 144-quinquies et seq. CONSOB also disseminated "Communication no. DEM/9017893 of 26-2-2009" containing a number of recommendations regarding "Appointment of members of administration and control bodies".

Auditors

The 21 April 2009 Shareholders' Meeting resolved to renew the Board of Statutory Auditors for the financial years 2009 - 2011, appointing Enrico Laghi, Paolo Gualtieri Paolo Domenico Sfameni as Standing Auditors and Luigi Guerra and Franco Ghiringhelli as Alternate Auditors.

They were appointed by the slate voting system. The single slate was presented by members of the Pirelli & C. Shareholders' Agreement, who obtained about 95% of the votes representing share capital with the right to vote at Shareholders' Meetings. In the absence of any members of the Board of Statutory Auditors coming from the minority slate, Enrico Laghi was appointed Chairman of the Board of Statutory Auditors.

The Shareholders' Meeting set the amount payable to each of the Standing Auditors each year as Euro 41,500 and determined the annual pay of the Chairman of the Board of Statutory Auditors at Euro 62,000.

Moreover, the Auditor asked to take part in the Supervisory Body under Legislative Decree no. 231/2001 (Paolo Domenico Sfameni) is paid an additional gross annual sum of Euro 15,000.

The composition of the Board of Statutory Auditors at the date of this Report is identified in Table no. 5.

A list of the positions held by Statutory Auditors in jointstock companies, limited liability companies and companies with unlimited responsibility is published by Consob on its website.

Note that as of the Date of the Report, no Auditor in office has notified the Company that he has exceeded the number of positions of administration and control permitted under article 144-terdecies of the Issuers' Regulations. In line with the provisions of the Self-Regulatory Code 65and as expressly ascertained by the Board of Statutory Auditors, on the basis of the information supplied by the Auditors and available to the Board of Statutory Auditors, all Auditors may be considered independent on the basis of the criteria set forth in the Code for directors and on the basis of Consob communication no. 8067632 of 17 July 200866.

The Procedure for Transactions with Related Parties, in compliance with the provisions of the regulations, qualifies Statutory Auditors as parties related to the Company; this means that if an Auditor has an interest in a given company transaction, the aforementioned procedure will apply, as described in greater detail above in the section on "Directors' Interests and Transactions with Related Parties". It follows that, in line with the provisions of the Self-Regulatory Code67, the Board of Directors will receive adequate information the nature of the relationship and on how the transaction is conducted.

Activities of the Board of Statutory Auditors

During the Financial Year the Board of Statutory Auditors met 7 times with a percentage of attendance of more than 90% (refer to the table for an analytic representation of the participation of individual members of the Board in meetings held during the year).

It is also worth noting that the members of the Board attended not only Shareholders' Meetings and meetings of the Board of Directors but also meetings held during the year by the Committee for Internal Control, Risks and Corporate Governance and the Remuneration Committee, a circumstance characterising the rules of corporate governance adopted by the Company and offering the Board as a whole the possibility of directly overseeing the activities of the Committees and performing its control functions more efficaciously.

During the Financial Year the Board of Statutory Auditors monitored compliance with the law and the Bylaws, compliance with the principles of correct administration and the adequacy of the Company's organisational structure, of its internal control system and administrative and accounting system and the latter's dependability for correctly representing events in operation.

It also monitored concrete implementation of the rules of corporate governance required by the codes of conduct prepared by companies that manage regulated markets or professional associations which the company declares it follows and the adequacy of the instructions given by the Company to its subsidiaries regarding the requirements for disclosure of price sensitive information68.

The Board of Statutory Auditors reported on its activities before the April 2010 Shareholders' Meeting and expressed its opinion of the aspects pertaining to it of the Directors' proposal regarding allocation of profits and the dividend to be distributed.

The Board of Statutory Auditors has monitored69 the independence of the external auditor, checking compliance with the provisions in this area and the nature and entity of services other than auditing of the accounts provided to Pirelli & C. and its subsidiaries by the external auditor and other companies in the same network as it.

The Board of Statutory Auditors has also verified correct application of the criteria and procedures applied by the Board of Directors to assess its members' independence. The Board of Statutory Auditors70 coordinated its work with the Internal Audit Department and, as we have noted, members attended all the meetings of the Committee for Internal Control, Risks and Corporate Governance and held periodic meetings with representatives of the external auditor, pursuant to article 150, subsection 3 of Legislative Decree 58/1998, which did not reveal any findings worthy of note.

Moreover, during the Financial Year the Board of Statutory Auditors expressed its opinion pursuant to art. 2389 of the civil code.

On the topic of the "new" powers of the Board of Statutory Auditors aimed at verifying that the proceedings (in terms of company processes and procedures) established by the Company for the "formation" and "dissemination" of financial information are adequately and effectively structured, the Board of Statutory Auditors examined the internal regulations and specifically the Manual of "Administrative processes and operative and control rules" created to represent in as much detail as possible the processes and activities of the Finance, Administration and Control area and therefore provide a common reference shared by all Group companies.

On the topic of surveillance of the efficacy of internal control systems, as already noted, the Board of Statutory Auditors already has the tools it needs for the new tasks by virtue of its attendance of the meetings of the Committee for Internal Control, as it has specifically received: (i) reports from Internal Audit Management at least once every quarter; (ii) an audit plan once a year; (iii) a risk assessment and management plan once a year (project undergoing start-up).

The Board has examined (a) the existing computer infrastructure of the control system in the Company and the Pirelli Group; (b) organisation of Internal Audit Management activities; (c) the "Principles of internal control". In order to permit effective coordination with the Committee for Internal Control, Risks and Corporate Governance, the Committee and the Board of Statutory Auditors have agreed to work together, while retaining the Board's central role, on specific areas pertaining to control of (i) the financial reporting process; (ii) the efficacy of the internal control, internal audit and risk management systems; (iii) statutory auditing of annual and consolidated accounts; (iv) the independence of the external auditor.


65 Self-Regulatory Code, Criterion of application 10.C.2
66 CONSOB Communication no. DEM/DCL/DSG/8067632 of 17-7-2008 regarding "Situations of incompatibility of members of control bodies under art. 148, subsection 3, lett. c) of the CFL".
67 Self-Regulatory Code, Criterion of application 10.C.4.
68 Now referred to as "sensitive information" (article 114 of the CFL).
69 Also in line with the Self-Regulatory Code: Criterion of application 10.C.5.
70 Self Regulatory Code: Criterion of application 10.C.6. and 10.C.7.