ACTIVITIES OF THE BOARD OF DIRECTORS

The Board defined the 2011 Business Plan and approved the Industrial Business Plan with an outlook extended to 2015The Board of Directors met 7 times during the 2011 financial year (including 6 meetings after the Board was reappointed), each meeting had an average duration of approximately one hour and forty-five minutes and the percentage attendance of the Directors was almost 90% and the percentage attendance of the Independent Directors was almost 95%.
The Lead Independent Director attended all the Board of Directors’ meetings.

2 Board Meetings were held in 2012 at the Date of the Report.

Evaluation of the general trend of operations17 and strategic Plans

The Board of Directors evaluated the general trend of operations and the foreseeable outlook at least on a quarterly basis, in accordance with the law18 and the Company Bylaws19.

More in particular, during the 2011 financial year the Board:

  • defined the 2011 Business Plan and approved the Industrial Business Plan with an outlook extended to 2015, taking into account the Group’s positive trend, and updated the 2012-2014 targets in the meeting held on November 8, 2011, as illustrated to the financial community in London on November 9, 2011;
  • approved the periodic accounting reports.
    On these occasions, the Board received information concerning the results achieved compared with: (i) the historical data; (ii) the budget targets, with a focus on any deviations;
  • approved the review of the 2011 targets notified to the market;
  • approved independently and in advance compared to the approval of the financial statements, the compliance of the impairment test procedure with the requirements of the international accounting standard IAS 36, as stated in the joint Bank of Italy/Consob/ISVAP document, dated March 4, 2010.

Internal control system and governance system20

During the meeting held on April 21, 2011, after its complete renewal, the Board of Directors confirmed the Corporate Governance system that had been adopted by the previous Board of Directors, as described in this Report.

More in particular, the Board, also:

  • confirmed compliance with the Self-Regulatory Code (March 2006 version) issued by the Italian Stock Exchange (Borsa Italiana) and identified the Board of Directors’ responsibilities, and subsequently, in the meeting held on March 12, 2012 verified their consistency with the new version of the Self-Regulatory Code to which the Board declared its compliance in the same meeting;
  • appointed the Chairman and the Managing Director and the Deputy-Chairmen of the Board of Directors;
  • identified the Director appointed to supervise the operation of the internal control system and confirmed the Officer responsible for the Internal Control function.
    In this regard, during the 2011 financial year, the Board approved the review of the remuneration “mix” referred to the Officer responsible for the Internal Control function, reducing the incidence of the variable component to achieve an alignment with the best practices concerning the remuneration of the control functions;
  • acknowledged the Company’s organisational system;
  • appointed the Lead Independent Director;
  • established the Advisory Committees and appointed their members;
  • confirmed the establishment of the Supervisory Board, appointed its members and established their fees;
  • confirmed the Director designated to prepare the Company’s accounting documents;
  • confirmed the identification of the Directors with strategic responsibilities;
  • initiated the verification of the requirements envisaged to be assigned the office as Director referred to each Board Member and the requirements to be qualified as Independent Directors referred to the Directors elected and qualified as such at the date their candidacy was proposed.

The Board of Directors assessed the adequacy of the internal control system on a half-yearly basis, and more in general, the governance system of the Company and of the Group the Company controls.

During the governance tools review and to adapt to the new regulatory provisions, the Shareholders’ Meeting held in April 2011 approved some amendments to the Company Bylaws, at the Board’s proposal, to adapt the Bylaws to the provisions of law introduced by Legislative Decree No. 27/2010 that implemented Directive 2007/36/EC in Italian law, aimed at facilitating participation in Shareholders’ Meetings by the shareholders of listed companies and by Legislative Decree No. 39/2010 concerning the implementation of Directive 2006/43/EC regarding the statutory auditing of annual accounts and consolidated accounts.

Furthermore, the Board approved the changes to the Organisational Model 231 deemed appropriate to take into account the introduction of environmental offences among the presumed offences provided for under corporate liability, pursuant to Legislative Decree No. 231.

In particular, a specific internal control scheme was introduced concerning the “obligations for environment-related activities” that  summarises the procedures and accepted practices already in place within the Pire lli Group.

In this regard the reader is referred to the section: Ethical Code, Policies and Organisational Model 231.

Accordingly, the Board of Directors verified the suitability of the means and the powers conferred on the Responsible Officer and endorsed the activities performed by the Responsible Officer for the purposes of issuing the own certificates concerning the Financial Statements as of December 31, 2010, an analogous activity was performed during 2012 in relation to the Financial Statements as of December 31, 2011.

The Board of Directors discussed the updated status concerning the legal action involving former employees of the Security Department that was kept under constant scrutiny by the Board of Directors, by the Committee for Internal Control, Risks and Corporate Governance, together with the Board of Statutory Auditors and the Supervisory Board.

Lastly, it is important to note that during the session held on March 12, 2012, the Board of Directors endorsed the considerations expressed by the Committee for Internal Control, Risks and Corporate Governance and proceeded to evaluate the Company’s overall organisation, administrative and accounting structure and expressed a positive opinion in relation to the internal control system, and more in general, the governance system of the Company and of the Group21.

Remuneration of Directors invested with special offices22

Following the appointment of the “new” Board of Directors during the 2011 financial year 2011, the Board examined and approved the proposals relating to the remuneration of Directors invested with special offices (Chairman and Managing Director and Deputy-Chairmen), further to the proposal by the Remuneration Committee, in addition to apportioning the overall remuneration assigned by the Shareholders’ Meeting.

Moreover, the Board established the annual targets relating to the incentive plans for the Chairman and Managing Director, the Directors with strategic responsibilities and as customary, performed the examination and the final summary of the annual incentives and targets referred to the previous financial year.

Lastly, in the meeting held on March 12, 2012 the Board approved the Remuneration Policy referred to the 2012 financial year, again based on the proposal by the Remuneration Committee and submitted to the advisory vote of the Shareholders’ Meeting convened to approve the 2011 Financial Statements and the Report referred to the 2011 financial year.

It is important to note that the remuneration due and payable to the Chairman and Managing Director (Marco Tronchetti Provera) was restructured during the 2012 financial year following the Chairman’s waiver of a significant part (approximately 20%) of the fixed annual gross remuneration established for the offices held in Pirelli and attributing greater incidence to the variable components.

In particular the fixed component, therefore, was restructured up to the end of the mandate, as follows:

  • a fixed gross fee amounting to euro 900 thousand, in addition to the fee received as the Managing Director (50 thousand euro gross) was established for the office held in Pire lli & C.;
  • a fixed gross fee amounting to euro 2 million and a variable fee was attributed for the office held in Pire lli Tyre.

It is important to note that as regards the incidence of the variable component, if the annual target objectives envisaged by the MBO 2012, 2013 and 2014, as well as the fixed target objectives established by the LTI 2012/2014 Plan are achieved, then the structure of the Annual Total Direct Compensation for the Chairman and Managing Director would be as follows:

  • fixed component: 40%;
  • variable component: 60% of which
    • annual variable component 23% of the Annual Total Direct Compensation (amounting to approximately38% of the total variable component);
    • long-term variable component (LTI Premium from coinvestment and net LTI Premium) 37% of the Annual Total Direct Compensation (equal to approximately 62% of the total variable component).

In this regard, the reader is referred to the updated Remuneration Report for the 2012 financial year (that includes the Remuneration Policy referred to the 2012 financial year and the Report referred to the 2011 financial year). The Remuneration Report referred to the 2012 financial year will be available on the Pirelli Internet website no later than 21 days preceding the Shareholders’ Meeting scheduled for May 10, 2012.

Transactions of significant strategic, economic, equity or financial importance23

The Board of Directors is responsible for the prior approval of some actions and transactions which are not intragroup (determined on the basis of qualitative criteria and quantitative thresholds) when executed by Pire lli & C. or by Italian24 and also foreign companies which are not listed and are subject to management and coordination activities by Pirelli & C.25, without prejudice to (i) the responsibilities and powers reserved by law and the Company Bylaws; (ii) the structure of the powers and (iii) internal procedures.

With regard to the last aspect it is important to note that the Board of Directors approved the principal transactions executed during the 2011 financial year.

More in detail, the Board of Directors approved the transaction to reduce the share capital described in greater detail in paragraph 2
sub-section a).

The Board received updates concerning the entry of Pire lli in Russia, and in particular, concerning the agreement with Sibur Holding (i) to transfer the Kirov plant to the joint-venture to be established between Pire lli and Russian Technologies, (ii) concerning the commitment to transfer other assets which it is envisaged can enable the joint-venture to achieve a production of 11 million units within 2014.

In this regard, it is important to remember that during 2010, Pire lli, Russian Technologies and Sibur Holding had reached an agreement to develop joint business activities in the sectors of tyres, steel cord and in the supply and high-technology production of synthetic rubber derivatives in Russia.

In particular, with regard to the tyre sector, the agreement reached lays the foundations to initiate a joint rationalisation and reorganisation process of the tyre business activities headed by Sibur Holding, a company that represents one of the major Russian groups in the petrochemical sector. In fact, the agreements envisaged a reorganisation process designed to select the assets of Sibur Russian Tyres (also including the Kirov production facility).

The Board of Directors then approved the renewal of the loan in favour of Prelios (formerly Pirelli RE) amounting to 160 million euro up to July 2017, since also representing a significant transaction with a related party.

The Board approved the launch of an American Depositary Receipt (ADR) Level 1 programme for the United States market.
In order to seize the best financing opportunities to provide continuous support for the business growth in a context of volatile financial markets the Board of Directors approved the issuance of non-convertible bonds up to a maximum face value of 800 million euro (or corresponding counter value in other currencies), also to be placed in several tranches on international markets within the end of 2012, and intended exclusively for qualified investors.

It is important note that the “procedure regarding information flows to Directors and Auditors”25 envisages general information on the
activities performed.

Transactions with related parties

As regards transactions with related parties, the reader is referred to the section “Directors’ interests and transactions with related parties”.

Board performance evaluation

Since the 2006 financial year, the Board of Directors has performed a self-evaluation process of its performance (so-called “Board performance evaluation”), thereby complying with international best practices and implementing the recommendations contained in the Self-Regulatory Code26.

The Board deemed it appropriate to confirm the structure of the self-evaluation process adopted in the past, also with reference to the 2011 financial year, based on a proposal by the Committee for Internal Control, Risks and Corporate Governance, and taking into account the positive experience of the previous years.

The self-evaluation process was performed with the support of a leading consulting firm (Key2People) that assisted the Committee for Internal Control, Risks and Corporate Governance to prepare the evaluation methods and to report the respective results.

In line with the most widely tested accepted practices, the self-evaluation process was implemented on the basis of direct interviews with individual Board Members preceded by a written questionnaire structured with 25 statements in relation to which the Board Member could express his/her own level of agreement/disagreement on a scale from 1 to 5.

The self-evaluation process has confirmed the Board Members’ full satisfaction concerning the decision-making processes of the Board and the Committees deemed to be of high quality. In particular, the high level of harmony among the Directors and between the Board and the Key Management concerning Company strategy; the constant monitoring of the operational and financial performance and the importance assigned to the control processes performed with the support of the Committees contribute effectively to achieving this result, even though the Board is in its first year.

The Board Members expressed their satisfaction concerning the level of involvement in adopting and developing the Industrial Plan and the need for greater awareness concerning some strategic aspects emerged (for example: R&D, Brand, Marketing), also to be achieved through greater involvement of the Key Management.

The consolidated practice of the Board’s interaction with Directors who have strategic responsibilities and that participate actively in the Board’s Meetings was greatly appreciated; this is deemed useful to enable the Board to achieve a better understanding of the abilities of the persons managing the company, as well as to receive support in the decision-making process.

An increasing involvement of the Key Managers is to be hoped for this reason and the need to further extend the Board’s knowledge of the Company’s organisation emerged.

The analysis also identified a high level of satisfaction concerning the completeness of the activity performed by the Committees and, as in the past, a unanimous appreciation was confirmed for the work performed by the Lead Independent Director.

The Board’s size, in numerical terms, then led to expressing the need for a more structured and continuous induction activity.

The self-evaluation indicated an overall satisfaction with regard to the reporting systems, although expressing the need for greater simplification of the representations.

Lastly, the mix of skills and expertise and the Board’s composition where very greatly appreciated.

Article 2390 of the Italian Civil Code

Article 10, last paragraph of the Company Bylaws envisages that the Directors are not bound by the competition prohibition set out under Article 2390 of the Italian Civil Code, unless otherwise resolved by the Shareholders’ Meeting.

17 Self-Regulatory Code: Application criterion 1.C.1., sub-section e).
18 Article 150 of the Unified Finance Law (TUF).
19 Article 11 of the Company Bylaws.
20 Self-Regulatory Code: Application criterion 1.C.1., sub-section b).
21 In this regard the reader is also referred to the paragraph below: “Committee
for Internal Control, Risks and Corporate Governance”.
22 Self-Regulatory Code: Application criterion 1.C.1., sub-section d).
23 Self-Regulatory Code: Application criterion 1.C.1., sub-section f).
24 In this regard, the reader is referred to the “General criteria to identify transactions with a significant impact: strategic, economic, equity or financial” duly reported in their up-to-date version on the Company's Internet website and at the end of the Report.
25 The “procedure regarding information flows to Directors and Auditors” is detailed in the end of the Report and is available on the Company's Internet website.
26 Self-Regulatory Code: Application criterion 1.C.1., sub-section g).