Committee for internal control, risks and corporate governance

Composition

The Corporate Governance System adopted by Pirelli & C. S.p.A. (hereafter, “Pirelli & C.” or the “Company”) from 2000, envisages setting up a Committee for Internal Control and Corporate Governance (hereafter, the “Committee”), in 2009 this Committee was renamed “Committee for Internal Control, Risks and Corporate Governance”.

The Committee has advisory and proposing functions and its mission is to assure the efficiency, effectiveness and correctness of the internal control system, on the one hand, and the corporate governance structure, in general, on the other hand, based on an appropriate preparatory activity in relation to the risk management system.

The Committee is appointed by the Board of Directors (that also indicates the Chairman) and remains in office for the duration of the Board of Directors’ mandate. At the Date of the Report the Committee is composed of four members, who are exclusively Independent Directors based on the more rigorous approach recommended by the “new” Self-Regulatory Code issued by the Italian Stock Exchange (Borsa Italiana) dated December 201148:

  • Carlo Secchi (Chairman):
  • Franco Bruni;
  • Elisabetta Magistretti;
  • Luigi Roth.

Two members of the Committee (Carlo Secchi and Franco Bruni) have adequate experience in accounting and finance matters, as duly assessed by the Board of Directors at the date the appointment was made. The Secretary of the Board of Directors, Ms. Anna Chiara Svelto acts as the Secretary to the Committee.

The entire Board of Statutory Auditors has the authority to participate in the Committee’s activities.

Duties assigned to the Committee

The Board of Directors was convened on April 21, 2011 and confirmed the duties – of a fact-finding and advisory nature – originally assigned to the Committee for Internal Control and Corporate Governance, moreover, in line with the duties indicated in the Self-Regulatory Code and also confirmed the corporate governance prerogatives which have characterised the Committee since it was established.

In particular, the CICRCG:

  • assists the Board of Directors:
    • (i) in defining the policy guidelines for the internal control system and risk management, so that the main risks concerning the Company and its subsidiaries are identified correctly and adequately measured, managed and monitored; (ii) in determining the degree of compatibility of these risks to assure a business management that is consistent with the strategic objectives identified. Following the Company’s approval of a new risk management and supervision model, the Committee was assigned advisory and/or proposing duties in relation to the new risk assessment and risk management model. In this regard the reader is referred to the paragraph “Risk governance system”.
    • in identifying an Executive Director appointed to supervise the operations of the internal control system and risk management in relation to the Company’s characteristics and risk profile;
    • in assessing the adequacy, efficiency and the effective operation of the internal control system at least once a year;
    • in describing the essential aspects of the internal control system in the corporate governance report, expressing its assessment concerning the system’s overall adequacy;
  • expresses an opinion on the proposals relating to the appointment, revocation, duties assignment and remuneration of the officer responsible for the Internal Audit function and assures that the officer obtains suitable resources to fulfil its functions;
  • assesses (a) the correct use of the accounting standards and their consistent application within the Group together with the Board of Statutory Auditors, the Company’s administration Managers, the Officer Responsible for preparing the company’s accounting documents and the auditors, for the purposes of preparing the Consolidated Financial Statements, (b) the possible letter issued by the statutory auditor outlining suggestions for the Company’s management and the possible report concerning the key questions which emerged during the statutory audit;
  • expresses opinions concerning specific aspects relating to the identification of the principal company risks, at the request of the designated Director, as well as the design, implementation and management of the internal control system;
  • examines the audit plan prepared by the Internal Audit Manager, as well as the periodic reports prepared thereby;
  • assesses the “Compliance Plan” once a year and the consequent report on the activities performed;
  • reports to the Board of Directors on the activity performed and the adequacy of the internal control system, at least at the time the Financial Statements and the interim report are to be approved;
  • supervises compliance with and the periodic update of the corporate governance rules and compliance with the rules of conduct which may be adopted by the Company and its subsidiaries. In particular, the Committee is also responsible for proposing the procedures and the timing for the Board of Directors to perform the annual self-evaluation;
  • performs the additional duties assigned to it by the Board of Directors, also in relation to supervising the procedural correctness and the substantial fairness of the operations.

As has been stated, the Board of Directors then assigned the responsibilities of the Committee for Transactions with Related Parties envisaged by the Consob regulatory requirements to the CICRCG, with the sole exception of issues concerning the remuneration of Directors and Executives with strategic responsibilities which are entrusted to the Remuneration Committee.

Operation

The Committee meets whenever its Chairman deems it appropriate, or whenever a request is made by at least one Committee Member, or by the Chairman of the Board of Directors or by the CEO, if appointed, and however, as often as appropriate to ensure that its functions are performed correctly.

The Secretary of the Board of Directors acts as the Secretary to the Committee.

The Senior Advisor Governance, the Internal Audit Manager, the Risk Officer and the Responsible Officer, as well as additional representatives of the Company and/or the Group generally attend the Committee’s meetings concerning specific matters when deemed appropriate by the Committee and representatives of the Audit Company are invited to attend when issues concerning the statutory audit of the accounts are discussed.

The Internal Audit Manager (who reports to the CICRCG and to the Board of Statutory Auditors) reports on his activities on a quarterly basis and presents the annual Audit Plan.

In addition, the Responsible Officer reports on the activities performed at least once a year.

The entire Board of Statutory Auditors has the authority to participate in the Committee’s activities.

The Committee’s meetings are convenient by a notice, also sent by the Secretary, at the request of the Committee’s Chairman.

The documentation and information available (and in any event the documentation and information required) are transmitted for the Committee members sufficiently in advance to enable the members to express their opinion in the meeting.

The presence of the majority of the members in office is required for the Committee’s meetings to be valid and the resolutions are passed with the absolute majority of the members in attendance. The Committee’s meetings may also be held using telecommunications media and are duly reported under the Secretary’s responsibility and transcribed in the special register49.

The Committee has adequate financial resources to perform its duties with absolute expenditure autonomy and may avail itself of external consultants when performing its functions.

The Committee has the authority to access company information and the functions relevant to performing its duties, availing of the Secretary’s support for this purpose50.

Activities during the financial year

The CICRCG met 17 times during the 2013 financial year; the average duration of the meetings was approximately one hour and 30 minutes. The tables provided at the end of the Report summarise the participation of the members in the Committee’s meetings reported in the 2013 financial year.

The Committee met 4 times during the 2014 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. During the 2013 financial year, the Committee expressed its positive assessment in relation (i) to the “new” whistleblowing policy, (ii) to the so-called Anti-Corruption Compliance Programme and (iii) to some amendments to the Company’s Organisational Model 231. In addition, the Committee endorsed the proposals relating to the changes to Pirelli’s Company Bylaws, subsequently approved by the Shareholders’ Meeting convened to approve the Financial Statements referred to 2012.

The Committee then examined the results of the 2012 Board performance evaluation and initiated the self-evaluation process referred to the 2013 financial year, examining the results during 2014. In this regard the reader is referred to the respective section.

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 reported in the following paragraphs: “Independent Directors” and “Maximum number of positions held in other companies”.

The Committee expressed its assessment on the activity performed by the Internal Audit management in order to acknowledge the 2012 variable incentive and expressed an opinion in relation to the 2013 incentive scheme, establishing a significant incidence of the qualitative targets to be assessed by the Committee.

The Committee also endorsed the policy to qualify the Chief Technical Officer Maurizio Boiocchi and the Chief Human Resources Officer Christian Vasino as “Executives with strategic business responsibilities”.

Lastly, the Committee submitted the 2012 Annual Corporate Governance and structure of share ownership Report to the Board of Directors for approval, as well as the half-yearly Corporate Governance Report published as a single document together with the half -yearly Financial Report as of June 30, 2013.

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 2013 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 met with the Responsible Officer during the 2013 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, 2012. A similar activity was performed in relation to the interim Financial Statements as of June 30, 2013 and the Annual Financial Statements as of December 31, 2013.

In addition, the Committee:

  • endorsed the procedure and the results of the socalled impairment test;
  • 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;
  • examined and positively evaluated the Audit Plan referred to the 2013 financial year submitted by the audit company Reconta Ernst & Young, and acknowledged that the analysis of the so-called Management Letter did not indicate “significant shortcomings” in the internal control system with reference to the financial information process;
  • assessed that the fees paid to the audit company for “non-audit services” were not excessive and did not influence the independence of the statutory auditor in any way.

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

Activities relating to transactions with related parties

The Committee expressed its preliminary favourable opinion concerning a number of transactions of minor importance implemented by the Company or by its subsidiary companies with related parties.

The Committee also examined and constantly monitored the negotiations relating to the transaction (with a major related party) intended to enhance the equity and financial position, as well as to relaunch the industrial prospects of Prelios S.p.A. (to be implemented by recapitalising and restructuring the financial debt of Prelios S.p.A.), as a result of which the Committee expressed its preliminary favourable opinion. In this regard, the reader is referred to the information document relating to the transaction published on the Pirelli Internet website.

The Committee also received a periodic information flow regarding the execution of transactions with minor related parties authorised by the Committee.

Furthermore, the Committee has taken into account that the Company adopted the Consob recommendation that envisages a review of the TRP Procedure at least every three years, and with the unanimous vote of its members has assessed the overall TRP Procedure to be valid and effective and proposed to the Board some marginal amendments to the TRP Procedure concerned (and the Board subsequently approved them).

In this regard, the reader is referred to the section: “Directors’ Interests and transactions with related parties”.

Activities relating to risk governance

During the 2013 financial year the Committee constantly supervised the risk assessment activity and the possible “mitigation” strategies relating to the principal risks.

48 2011 Self-Regulatory Code - Principle 7.P.4.
49 Also in line with the requirements of the Self-Regulatory Code Application Criterion 4.C., sub-section d).
50
2011 Self-Regulatory Code: Application Criterion 4.C.1., sub-section e).