Activities during the financial year

The Committee for Internal Control, Risks and Corporate Governance met 10 times during 2011 (8 times after the Committee was reappointed) and all the Committee members attended its meetings, only one member was reported absent at two meetings. The average duration of the meetings was about three hours.

The Committee met twice during the 2012 financial year up to the Date of the Report.

Activities relating to Corporate Governance

The Committee made a real contribution to the process of implementing and constantly updating the corporate governance tools of the Company and of the Group. Accordingly, during the 2011 financial year, the Committee endorsed the review (a) of the operating procedures; (b) the processes and (c) the top management reports of the organisation that will accompany the Group to “execute” the Industrial Plan (in this regard, the reader is referred to Section 4.5.2).

The Committee then examined and approved the proposals, subsequently approved by the Board of Directors, concerning the alignment of the Company Bylaws to the regulatory provisions, in particular (i) with Legislative Decree No. 27 dated January 27, 2010 concerning the “Implementation of Directive 2007/36/EC, regarding the exercise of certain rights of shareholders in listed companies” and (ii) with Legislative Decree No. 39 also dated January 27, 2010, concerning the “Implementation of directive 2006/43/EC regarding the statutory auditing of the annual and consolidated accounts, amending directives 78/660/EEC and 83/349/EEC and abrogating directive 84/253/EEC”.

The Committee also examined in advance additional proposals to amend the Company Bylaws approved firstly by the Board of Directors and then by the Shareholders’ Meeting convened to approve the 2010 Financial Statements concerning the implementation of a number of rights envisaged by Legislative Decree No. 27/2010 in order to further promote the participation and exercise of voting rights in the shareholders’ meeting.

During the 2011 financial year, the Committee examined the results of the 2010 Board performance evaluation (as already been described in detail in the Company’s Governance Report referred to the 2010 financial year) and initiated the self-evaluation process referred to the 2010 financial year, examining the results during 2011. The reader is referred to the respective section with regard to the latter point.

Again, with reference to “corporate governance” the Committee managed the investigation concerning the existence of the independence requirements of Directors and compliance with the Policy concerning the Maximum number of appointments deemed to be compatible with the position of a Director of Pirelli, the results of which are detailed in the following paragraphs: “Independent Directors” and “Maximum number of positions held in other companies”.

The Committee approved in advance a number of changes to the Company’s Organisational Model 231 following the periodic risk analysis activity ordered by the Supervisory Body that, on the one hand, resulted in confirming in the “Organisational Model 231” all the internal control schemes relating to the instrumental and operational processes, and on the other hand, the inclusion of internal control schemes relating to the “Market Abuse” operational process and the “Use of Information Technology Tools” operational process, as well as the operational process relating to the “requirements for environmental activities”; for further details in this regard the reader is referred to the section on the Ethical Code, Policies and Organisational Model 231.

The Committee approved the programme of the Committee’s activities for the 2012 financial year, also to permit the Independent Directors who do not participate in the Committee to request the Committee to discuss specific issues.

The Committee expressed its assessment on the activities performed by the Internal Control Officer and the Internal Audit Director in order to acknowledge the 2010 variable incentive and expressed an opinion in relation to the 2011 incentive scheme, establishing a significant incidence of the qualitative targets to be assessed by the Committee. During the 2011 financial year the Committee proposed to the Board (and the Board duly approved) a review of the remuneration “mix” referred to the Internal Control Officer reducing the incidence of the variable component in order to obtain an alignment with the best practices relating to the remuneration of the control functions.

Lastly, the Committee submitted the Half-Yearly Corporate Governance Report to the Board for approval, published as a single document together with the Half-Yearly Financial Report as of June 30, 2011.

Activities relating to Internal Control

The Committee approved the final results of the activities performed to implement the annual Audit Plan and approved the Audit Plan for the next financial year. The Committee focused on the analysis of the structure and the operation of the Internal Audit Function, and in particular, the procedures to set out the 2011 Audit Plan, in this regard the reader is referred to the “Internal Control System” section.

The Committee constantly monitored the work performed by the Internal Audit Department and the implementation of the plans of action concerning the corrective measures required to assure an on-going improvement of the system and periodically examined the report of the activities performed. The Committee also examined the report of the activities performed by the Compliance Function and the Plan of activities referred to the 2011 financial year.

The Committee met with the Responsible Officer at the start of the 2011 financial year, and the Responsible Officer reported on the suitability of the means and the powers attributed, as well as on the activities performed in relation to the Financial Statements for the year ended December 31, 2010, a similar activity was performed during 2012 in relation to the Financial Statements as of December 31, 2011.

In addition, the Committee:

  • endorsed the procedure and the results of the so-called impairment test;
  • examined and positively evaluated the Audit Plan referred to the 2011 financial year submitted by the audit company Reconta Ernst & Young;
  • focused on a number of issues concerning the application of the accounting standards, together with the audit company and the Responsible Officer, in particular, with reference to the treatment of shareholdings in associate companies;
  • endorsed in advance the operation to reduce the share capital described in paragraph 2, sub-section a);
  • was informed of the periodic meetings between the Board of Statutory Auditors and the Audit Company which did not reveal any significant situations and/or information;
  • endorsed the start of a project to implement a structured and integrated model able to identify “automatically” potential shortcomings in the internal control system which may “favour” prejudicial conduct.
    The project also aims to integrate the traditional cyclic approach, based on limited samples, with continuous and automated audit activities performed in “real time”;

Among other activities, the Committee examined in advance the following transactions and the following issues, subsequently submitted to the Board’s examination (accordingly, the reader is referred to the section “Activities of the Board of Directors”) for further details:

  • endorsed the letter of suggestions submitted by the statutory auditor forwarded to the Company’s management;
  • proposed amendments to the Company Bylaws, as mentioned previously;
  • development of events, also legal issues which involved two of the Company’s former Security officers;

The Committee expressed a preliminary favourable opinion concerning some transactions of lesser importance executed by the Company or by its subsidiaries in application of the current Principles governing transactions with related parties and prior to the adoption (November 3, 2010) of the Procedure governing transactions with related parties, and also expressed a favourable opinion on the transaction involving the renewal of the loan in favour of Prelios (formerly Pirelli RE), that was then duly approved by the Board of Directors.

The Committee received a periodic information flow concerning the execution status of the transactions with related parties of lesser importance duly authorised by the Committee.

After consulting the Board of Statutory Auditors the Committee approved a procedure to confer appointments other than the statutory audit on the auditing company appointed to perform the statutory audit of the accounts of Pirelli & C.

Lastly, the Committee confirmed its positive opinion concerning the adequacy of the internal control system and the governance system of the Company and the Group53 based on the activities performed, the assessments made, the information received and the documentation examined.

Activities relating to Risk Governance

The Committee constantly supervised the risk assessment activity during the financial year acknowledging the risk classification in “strategic risks”, namely, risks related directly to achieving one or more targets of the Plan, and “transversal risks”, namely, risks which, although not related directly to the strategic targets, may however, prejudice achieving the targets by involving transversely several corporate processes/areas and also approved the Group’s Annual Risk Assessment and Mitigation Plan, listing the main risks to which the Company is exposed and their respective mitigation plans.

The Committee examined in detail alternative crisis scenarios and their possible impacts on the Company’s Industrial Plan and possible mitigation actions.

The Committee approved specific mitigation plans on the basis of this analysis in order to maintain the risk exposure levels within acceptable limits and governance and control guidelines will be defined for their implementation.

As has been stated, the reader is referred to the “Risk Governance System” section for further details.

53 Refer to the section “Role of the Board of Directors” and the paragraph “Internal control and governance system”.