Pirelli & C.

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The Group’s sustainability tools

Corporate Governance

The awareness that an efficient corporate governance system is key to achieving sustainable value creation objectives drives the Group to keep its own corporate governance system constantly in line with national and international best practices.

Pirelli has adopted the traditional management and control system based on the central role of the Board of Directors. The Group’s corporate governance model is based on fair practices for disclosure of the choices and processes followed in making business decisions, an effective internal control system and effective rules applicable to potential conflicts of interest.

Pirelli & C. has adhered to the Corporate Governance Code of listed companies ever since it was first published by Borsa Italiana (in July 2002). The company affirmed its adherence to the new version of the Corporate Governance Code (dated March 2006) at the Board of Directors meeting on March 12, 2007.

The other key features of the Pirelli governance system include:

  • a high level of transparency, with semi-annual updates on additions/integrations to the corporate governance system so to reflect any changes from what was illustrated in the Annual Report;
  • the presence in the board of a large number of Independent Directors, amounting to 55% of the Board of Directors and more than 65% of total non-executive directors;
  • the important role given to minority shareholders, who elect 20% of the Board of Directors when lists are submitted (currently 4 out of 20);
  • the establishment of a Board Committee comprised solely of Independent Directors;
  • designation of a Lead Independent Director, who is assigned an active and effective role in co-ordinating the requests and contributions of independent directors.
  • periodic meetings of the independent directors and work meetings of directors with top management in order to improve their familiarity with the company’s actual operating conditions and facilitate their contribution to management;
  • the Board of Directors’ consolidated practice of reviewing its own performance, with the aid of an expert consulting firm.
  • a new model for management and governance of managerial risks
  • establishment of the Group Compliance function
  • drafting of the Group Whistle-blowing Procedure

The corporate governance model of Pirelli & C. received major recognition in July 2009, complementing the positive ratings awarded by leading financial sustainability indices during the year: the specialised corporate governance research firm GMI (Governance Metrics International) named it the best in Italy, after receiving a 10/10 score. In its last Country Ranking (September 2008), the firm gave Italy an average score of 5.32/10.

Aside from topping the national ranking, Pirelli received a rating of 9/10 in a ranking of 4,162 companies that were rated worldwide. This rating puts it at the top of groups operating in the “Automotive and Components” sector, in which the average score is 5/10.

For further details on the Pirelli Corporate Governance system, reference is made to the relevant section in the Annual Report. The section dedicated to the company’s Corporate Governance System can also be accessed through the homepage of the website www.pirelli.com.

The following three sections illustrate the details of the newly adopted Risk Management Model, the “Group Compliance” function and the Group Whistle-blowing Procedure.

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Risk Governance

In July 2009 the Board of Directors of Pirelli & C. examined and approved a new risk management system that is in line with international best practices. This system addresses risks that could prevent achieving the strategic objectives set out in the company Industrial Plan and Management Plans.

Given the acceleration in economic changes, complexity of operating activities and recent regulatory changes in the areas of corporate governance and internal control, the Board of Directors decided to implement a structured process for management of corporate risks that would permit prompt, thorough identification and adoption of adequate measures for pro-active ex ante risk management instead of reactive ex post responses.

The Board assessed the importance of identifying risks before they arise and implementation of appropriate corporate decisions and instruments to prevent them, reduce their impact and, more generally, "govern them," without ignoring the fact that simply assuming them is fundamental to business management.

When fully implemented, the new risk management system envisages that the Board of Directors, as supported by its Internal Control, Risk and Corporate Governance Committee, annually define the “acceptable risk threshold1,” and annually approve a “risk assessment and management plan” that specifically defines the principal material risks and consequent mitigation plans. Finally, the Board will issue the guidelines for definition of the “risk policies” for governance of specific, existing and prospective risk events.

The chosen system is based on a “top-down” and “value driven” approach, involving identification and management of the risks that might prejudice the achievement of strategic objectives and/or impair the Group’s value drivers.

The risks are then classified as Strategic, i.e. directly related to the realisation of one or more value drivers, and Transversal which, although they are not directly correlated with the value drivers, might still interfere with their realisation by affecting several corporate processes/areas.

Consistently with this approach, top management sets the guidelines for identifying priority areas at risk and specific events with a potential impact on the objectives illustrated in the Industrial Plan or on strategic corporate assets. These events are then subjected to exact analysis, with the participation of the managers in charge of business units, central staff functions, and regional or country managers.

A special corporate department has been set up that reports directly to the Group General Counsel. The purpose of this department is to reinforce the Pirelli corporate governance system. This department, which is staffed by a Risk Officer, will guarantee adequate co-ordination with the Director assigned to supervise the functioning of the Internal Control System.

Reference is made to the “Directors’ Report on Operations” in the 2009 Annual Financial Report, and specifically to the section on “Risks and Uncertainties” for discussion of the Risks Associated with the Businesses in which the Group Operates, Financial Risks, Risks Connected with Human Resources, Risk Connected with the Country and Risks Connected with Environment.

Risk management includes the identification, analysis and monitoring of environmental, social and financial risks that are not only directly associated with the company but also connected with the sustainability of the supply chain.

Together with constant co-ordination and monitoring at the corporate level, compliance with Pirelli economic, social (especially human rights and labour rights) and environmental sustainability rules is constantly assessed in periodic audits commissioned to external specialised firms. Special attention is dedicated to the sustainability of Pirelli and supplier sites in countries of concern (as defined by EIRIS).

In 2008 independent audits were carried out at Pirelli production plants and commercial locations in Turkey, Brazil, Venezuela, Argentina, Egypt, China, Romania, Colombia, Mexico and Chile (commercial offices only are located in the last three countries) to monitor internal compliance with the SA8000® Standard (the benchmark tool used by the Group to manage social responsibility).

Several plans for remedial measures were implemented in 2008 in consequence of these audits.

In 2009 independent audits were carried out on the Supply Chain operating in countries of concern, involving a total of 72 suppliers.

For more information about these audits, please see the “Suppliers” section elsewhere in this report.

Ad hoc assessments are also carried out before entering a specific market, in order to assess any political, financial and social risks, including those connected with respect of human and labour rights. Once the Company sets up operations in such a market, this will enable it to better manage the gap between local practises and Company, social and environmental responsibility policies, which will be applied on a mandatory basis.

In regard to the prevention of corruption and related offences, and conduct in violation of corporate ethics, the Ethical Code distributed to all employees and applied on suppliers provides that the Pirelli Group:

  • “will not tolerate corruption in any guise or form, or in any jurisdiction, or even in places where such activity is admissible in practice, tolerated, or not challenged in the courts. For this reason, Addressees of the Code are prohibited from offering complementary gifts or other benefits that could constitute a breach of rules, or are in conflict with the Code, or might, if brought to public notice, damage the Pirelli Group or just its reputation;”
  • “defend and protect its corporate assets, and shall procure the means for preventing acts of embezzlement, theft, and fraud against the Group”;
  • “condemns the pursuit of personal interest and/or that of third parties to the detriment of social interests”.

The activities carried out within the framework of the Internal Control System are also of substantial importance. It has been described by the Ethical Code as follows:

“The efficiency and effectiveness of the internal control system are essential for operating the business in keeping with the rules and principles of this Code.”

“Internal control system” refers to a mix of aids, activities, procedures, and organizational units that, through an integrated process of identification, measurement, and monitoring of major risks, secures the following aims:

  • the efficacy and efficiency of business operations, so also guaranteeing that documents and decisions are traceable;
  • the reliability of accounting and management information;
  • compliance with laws and regulations;
  • the safekeeping of Company assets.

For the purposes of the above the Addressees of the Code are required to contribute to the constant improvement of the internal control system.

In carrying out their work and in connection with their separate spheres of responsibility, the control and supervisory bodies, Internal Audit, and the independent auditors enjoy direct, full, and unfettered access all personnel, activities, operations, documents, archives, and assets of the business.

The Group Whistleblowing Procedure is used to handle any cases of corruption. More details are found in the specific paragraph below that addresses this topic.

Group Compliance Function

In 2009 Pirelli also set up a Group Compliance Function that is independent from the Internal Audit Department. This new department reports to the General Counsel and Group Compliance Officer. It works with other Group departments to ensure that internal rules, processes and corporate activities in general always comply with applicable laws and regulations.

In accordance with best practices, the Group Compliance Function monitors the risk of non-compliance with laws, regulations and internal codes of conduct in order to prevent judicial and administrative penalties or material financial losses or damage to reputation.

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Group Whistleblowing Procedure

On September 7, 2009 the Group published its Whistleblowing “Procedure for reporting violations, suspected violations and inducement to commit violations of laws and regulations, the principles set out in the Ethical Code, internal control principles, corporate rules and procedures, and/or any other acts or omissions that might cause direct or indirect financial damage or harm to the image of the Group and/or its subsidiaries.

Employees who are aware of potential or actual violations are encouraged to report them immediately to the Company, either anonymously or openly. They are guaranteed the absolute confidentiality of their identity and will not suffer reprisals of any sort.

These reports may involve company directors, statutory auditors, management and employees, as well as anyone else who operates inside or outside Italy on behalf of the Pirelli Group or has business relationships with the Group. This includes partners, customers, suppliers, consultants, independent contractors, accounting firms, and public institutions and entities.

The reports may be sent to the company by sending a message to a special e-mail address or by telephoning or sending a fax to dedicated telephone numbers. The e-mail box and telephone and fax numbers are managed at the corporate level by the independent Internal Audit Department and are to be used by all Group affiliates.

The Group Internal Audit Department will:

  • set up, manage and update the addresses where reports can be sent;
  • receive, register and analyse the received reports by engaging the participation of other corporate departments and offices for investigation as necessary and forwarding any reports to the supervisory bodies with jurisdiction according to the situations were a specific body exists (for Italian companies: the Board of Statutory Auditors, the Supervisory Bodies for offences pursuant to Legislative Decree 231/01);
  • prepare specific action plans;
  • ensure the retrieval and storage of documentation for five years after the conclusion of the investigation;
  • file a quarterly report with the Internal Control Committee of Pirelli & C S.p.A. or of Pirelli & C Real Estate S.p.A. on reports received and actions underway.

If it is ascertained that the report is valid, the company must take appropriate disciplinary measures and legal action to protect itself and the Group.

The Whistleblowing Procedure was distributed to all Group employees in their local language version, with distribution being completed at the end of October 2009. No report was received between that time and December 31, 2009. A suspected case of violation of the Ethical Code has been under investigation since 2009, not yet completed at the date of this report. In any event, the amount of this alleged violation is not material.

Organisational Structure

Governance of Sustainability is centred around the Sustainability Steering Committee.

This high-level body was formed by the Chairman at the beginning of 2004 to guide the advancement of sustainability throughout the Group. The organisational structure is made up of a Group Sustainability Director, who reports directly to the Group General Counsel, a Group Sustainability Manager and company Sustainability Referents (responsible for each Group affiliate).

In September 2009 the Equal Opportunities Steering Committee was merged with the Sustainability Steering Committee, following a decision taken by the latter, to realise operating opportunities and efficiency in regard to matters that had effectively been part of Group sustainability management.

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Group operating Procedure

The Operating Sustainability Rule (issued on September 16, 2006) sets out and regulates the methods applied for internal management of the related activities, with particular attention to the roles and responsibilities of the departments involved. These regulations also govern the planning and control processes, the process of drawing up the Sustainability Report and the dissemination of information to the external community.

These rules specifically provide for the full integration of sustainability in the Group’s financial reporting structure. The cycle of planning and control of sustainability follows the Group’s reporting and planning calendar.

Adopted management systems

Pirelli devotes significant resources to management systems. The Group utilises these tools to improve the quality, effectiveness and efficiency of its processes, in view of continuously reducing impact on the health of its employees, on safety conditions in the workplace and on the environment.

The following management systems have been adopted:

OHSAS 18001 for occupational health and safety
ISO 14001 for the environment
ISO 9001, ISO/TS 16949, ISO/IEC 17025 for product quality

The international SA8000 ® standard was adopted in 2004 as the benchmark for assessing the consistency of the Group’s conduct with the Social Responsibility principles set out in the standard.

The number of certified sites according to type of management system at December 31, 2009 and the targets for 2010 are described in the specific paragraphs of the chapters Social Dimension (sections on Health and Safety), Environmental Dimension (section on Environmental Management and Certifications System), and Economic Dimension (section on Customers).

IT System for CSR information management

The “CSR-DM” (CSR Data Management) system is an IT system for the management of Group sustainability information.

Created in 2007 to improve the efficiency of the process of contribution, validation, consolidation, analysis and management relating to sustainability, the system has been used to collect the data reported in the annual Sustainability Report.

1 Acceptable risk threshold or risk appetite are defined in the Committee of Sponsoring Organization Enterprise Risk Management Framework as “the amount of risk, on a broad level, an entity is willing to accept in pursuit of value”.