Annual corporate governance report – 2007 Financial Year

GLOSSARY

Self-Regulatory Code: means the Self-Regulatory Code of conduct for listed companies approved in March 2006 by the Corporate Governance Committee and promoted by the Italian stock exchange, Borsa Italiana S.p.A.;

Civil code: means the Italian Civil Code;

Board / Board of Directors: means the board of directors of Pirelli & C.,

CONSOB: means the Commissione Nazionale per le Società e la Borsa, the Italian official body for regulating and supervising companies and stock exchanges;

Date of approval of the Report: means the meeting of the Board of Directors on 26 March 2008 that approved this report;

Responsible Officer: indicates the officer responsible for preparing the company accounting documents referred to in article 154-bis of the FSA;

Financial year: indicates the company financial year that ended on 31 December 2007 to which the Report refers;

Savings Law: indicates law no. 262 of 28 December 2005, in the ordinary supplement of the Gazzetta ufficiale della Repubblica italiana (Official Gazette of the Republic of Italy) no. 301 of 28 December 2005;

Market Regulation Instructions: indicates the Instructions for the Regulation of Markets organised and managed by Borsa Italiana S.p.A.;

Pirelli & C. indicates Pirelli & C. S.p.A. with registered offices in Milan, tax code, VAT number and Milan Business registry no. 00860340157;

Pirelli RE: indicates Pirelli & C Real Estate S.p.A., with registered offices in Milan, tax code, and Milan Business registry no. 02473170153;

Pirelli Tyre: indicates Pirelli Tyre S.p.A.. with registered offices in Milan, tax code, and Milan Business registry no. 07211330159;

Market Regulations: indicates the Market Regulations organised nd managed by Borsa Italiana S.p.A.;

Consob Issuer Regulations: indicates the Regulations issued by Consob with deliberation no. 11971 of 1999 on the subject of issuers;

Consob Market Regulations: indicates the Regulations issued by Consob with deliberation no. 16191 of 2007 on the subject of imarkets;

Report: indicates this corporate governance report drafted pursuant to article 124 bis of the FSA, 89 bis of the Consob Issuer Regulations and article IA.2.6. of the Market Regulation Instructions;

Company: indicates Pirelli & C.;

FSA: indicates Legislative Decree no. 58 of 24 February 1998 (the Testo Unico della Finanza, or consolidated Financial Services Act).

1. PROFILE OF THE ISSUER

Pirelli & C is a company listed on the Italian Stock Exchange that controls a multinational Group that does business in 160 countries with 135 years’ experience in industry.

In the tyres sector it operates Pirelli Tyre, the fifth largest manufacturer in the world, in terms of turnover, and leader in the high quality tyre market, with an industrial presence on four continents.

In the property sector it trades as Pirelli RE, a company which in just a few years has established its leadership in Italy, and recently started to expand into Central and Eastern Europe.

With its strong orientation towards innovation, the Group has also initiated a number of start-up initiatives in recent years, in high technology sectors such as new generation photonics, broadband access, sustainable mobility and renewable energy sources.

Pirelli Labs S.p.A. is the advanced research centre that serves all the Group businesses.

The Company is aware of the importance of its Corporate Governance system in fulfilling its objective of creating value for all shareholders and making progress in sustainable development, and thus induces the Company to keep its own corporate governance system constantly in line with national and international best practices, as well as making sure that it is up to date with legislative changes.

The Company uses the traditional administration and control model, founded on the central position of the Board of Directors, on the presence of correct disclosure practices regarding the choices and the procedures for decision-making within the Company, on an effective system of internal controls, on an effective monitoring for potential clash of interests and on a rigorous code of conduct for transactions with related parties.

The system of governance is documented in the Code of Ethics, in the Company bylaws, in the Regulations regarding shareholders’ meetings, and in a series of principles, rules and procedures, periodically updated to reflect regulatory changes, that are available on the website of the Company at www.pirelli.com under the Governance section dedicated to the Governance, and in the policies and guidance of the Board of Directors.

Moreover, the Company has been publishing its corporate governance reports since 2005 – further information is available in the appropriate section in the company financial reports.

It should be noted that the Company highlights updates and additions made to its corporate governance system since the preceding annual report in its half-yearly report.

2. INFORMATION on the SHAREHOLDER STRUCTURE (ex art. 123 bis FSA) at (26/03/2008)

a) Structure of the share capital

The Report takes into account the share capital reduction operation approved by the extraordinary shareholders’ meeting on 12 December 2007, and, for those matters pertaining to such shareholders, by the special meeting of savings shareholders’ held on 14 December 2007.

Specifically, the shareholders approved the voluntary reduction in the share capital from euros 2,791,311,344.64 to euros 1,556,692,865.28 by reducting the par value of ordinary and savings shares from 0.52 to euro 0.29.

The purpose of the reduction is to allow shareholders to be reimbursed for some of the financial resources obtained as a result of the sale of the holding in Olimpia S.p.A., by distributing an “extraordinary dividend” of 0.154 euros per share (for a total of approximately 827 million euros), and to optimise the equity structure of the company by allocating approximately 408 million euros to the reserve.

The capital reduction operation will be completed on 31 March 2008, and the “extraordinary dividend” will be payable from 31 March 2008 (with coupons to be surrendered on 3 April 2008).

The bylaws updated with the new values will be filed after the above-mentioned dividend has been paid.

The Share capital is divided into ordinary shares and savings shares; the table below shows its exact composition.

No. shares

% of share capital

Listing

Ordinary shares*

5,233,142,003

97.49%

Listed on the MTA (Mercato Telematico Telematic Stock Market) organised
and managed by Borsa Italiana S.p.A. – Blue Chip segment.

Savings shares**

134,764,429

2.51%

Listed on the MTA (Telematic Stock Market) organised and managed by Borsa Italiana S.p.A. – Blue Chip segment.

* Identification code ISIN IT0000072725

** Identification code ISIN IT0000072733
Rights and obligations

Ordinary shares entitle the holder to one vote each. They are registered shares or bearer shares, to the extent permitted by law, and in this case can be converted into the other type of shares at the request and expense of their owner.

Savings shares do not have voting rights and, unless otherwise provided by law, are bearer shares. At the request and expense of the shareholder they can be converted into registered savings shares.

In addition to the rights and privileges specified by the law and the Company bylaws, savings shares have pre-emption in the reimbursement of capital for their whole face value; if the share capital is reduced by losses, the face value of the savings shares is only reduced for the part of the losses that exceeds the overall face value of the other shares. They also retain the rights and privileges assigned to them by the law and the Company bylaws, even when excluded from negotiations of ordinary and savings shares.

If share capital should be increased by the issue of shares of a single category, they must be offered as an option to all categories of shareholders.

If capital is increased by the issue of both ordinary and savings shares:

a) holders of ordinary shares have the right to receive options for ordinary shares and, for any difference, savings shares;

b) holders of savings shares have the right to receive options for savings shares and, for any difference, ordinary shares.

The net annual profits are divided as follows, after the legal allocations have been made:

a) savings shares are attributed a sum totalling seven percent of their par value; if a dividend of less than seven percent of the par value has been assigned to the savings share in a financial year, the difference is calculated by increasing the privileged dividend in the two subsequent years[1]; the profits remaining after assignment of the above dividend to the savings shares are split between all the shares so that the savings shares are entitled to a total dividend that is two percent of their par value higher than the dividend payable to the ordinary shares;

b) without prejudice to the above provisions concerning the increased total dividend payable on savings shares, ordinary shares are attributed a sum totalling five percent of their par value[2].

The remaining profits will be distributed to all the shares, in addition to the sums assigned as described in letters a) and b) above, unless the shareholders’ meeting should decide to approve the Board’s proposal to make special allocations to extraordinary reserves or other uses, or should to carry forward part of said share of the profits.

If reserves are distributed the savings shares have the same rights as the other shares.

Financial instruments that attribute the right to subscribe to new issue shares.

At the date of approval of the Report no financial instruments that attribute the right to subscribe to new issue shares have been issued.

It should be noted that in a decision made by the extraordinary shareholders’ meeting held on 11 May 2004, the Directors were given the right to issue convertible bonds in both ordinary and savings shares, or with warrants valid for the subscription of such shares to be offered as options to shareholders and holders of convertible bonds, for a maximum nominal sum of 1,000 million euros, before 10 May 2009, in one or more operations, within the limits permitted at the time of issue by the current regulations, with a consequent possible increase in share capital to serve the conversion of the bonds and/or the exercise of the warrants. See the section below entitled “Powers to increase the share capital and authorisations to purchase own shares”.

Stock incentive plans

See the financial report and the information prospectus prepared pursuant to art. 84 bis of the Consob Issuer Regulations available on the Company website www.pirelli.com Governance section.

b) Restrictions on the transfer of securities

There are no restrictions on the transfer of securities.

c) Major shareholdings

Those subjects holding voting shares corresponding to more than 2% of the ordinary share capital according to the register of shareholders supplemented by the communications received pursuant to art. 120 of Legislative Decree no. 58/1998 and other information available are listed below:

Declaring subject

% share of ordinary capital

% share of voting capital

1

MARCO TRONCHETTI PROVERA

26.19

26.19
 

of which directly

0.00

0.00
 

and indirectly through CAMFIN S.P.A.

26.17

26.17
 

and through Cam Partecipazioni S.r.l.

0.02

0.02

2

ASSICURAZIONI GENERALI S.p.A.

5.49

5.49
 

of which directly 113,926,593 shares (2.18%)

 

and indirectly through:
 

- Ina Assitalia SpA - 104,949,245 shares (2.00%)
 

- Generali Vie S.A - 57,400,000 shares (1.10%)
 

- Alleanza Assicurazioni SpA - 964,282 shares (0.02%)
 

- Intesa Vita SpA – 842,952 shares (0.02%)
 

- La Venezia Assicurazioni SpA - 38,640 shares (0%)
 

- Toro assicurazioni SpA 8,923,725 shares (0.17%)

3

RAGIONE DI GILBERTO BENETTON & C. S.a.p.A.

4.77

4.77
 

indirectly through EDIZIONE HOLDING S.p.A.

4

MEDIOBANCA S.p.A.

4.61

4.61

5

PREMAFIN FINANZIARIA S.p.A.

4.48

4.48
 

of which indirectly through
 

FONDIARIA – S.A.I S.p.A.

4.45

4.45
 

- Milano Assicurazioni SpA- 1,296,000 shares (0.02%).
 

- Sasa Assicurazioni e Riassicurazioni SpA – 26,664 shares (0%)
 

- Novara Vita SpA – 149,332 shares (0%)
 

- Sasa Vita SpA – 3,332 shares (0%)

6

ALLIANZ SE

4.41

4.41
 

indirectly through Allianz S.p.A.

7

AMBER CAPITAL LP

2.16

2.16
 

(as manager of Amber Master Fund Cayman Spc.
which holds the entire shareholding)

Note: The information on shareholders who directly or indirectly hold ordinary shares corresponding to 2% or more of the capital with voting rights in ordinary meetings of the Company shareholders is also available on the website of the Commissione Nazionale per le Società e la Borsa (Consob). In this respect, it should be noted that the information published by Consob on its website by virtue of the communications made by the subjects required to fulfil the obligations of article 120 of the FSA and Consob Regulation 11971/99, may differ appreciably from the real situation, since the obligations to communicate changes in the percentage holdings arise not when these percentages change, but only when they “exceed” or “fall below” predetermined thresholds (2%, 5%, 7.5%, 10% and subsequent multiples of 5). It follows as a result that a shareholder (i.e. a declaring subject) which has declared ownership of 2.6% of the voting capital may increase their holding to up to 4.9% without any obligation to communicate this to Consob pursuant to art. 120 of the FSA.

d) Securities that confer special rights

No securities that confer special monitoring rights have been issued.

e) Employee shareholdings: mechanism for exercising voting rights

There are no mechanisms for exercising the voting rights of employee shareholders when the voting rights are not exercised directly by said employees.

f) Restrictions on voting rights

There are no restrictions on voting rights (such as, for example, limitations on voting rights at a certain percentage or a certain number of votes, terms imposed on the exercise of voting rights, or systems in which, with the cooperation of the Company, the financial rights related to the securities are separate from the ownership of the securities).

g) Shareholder agreements

Participants in the Pirelli & C. S.p.A. Block Share Syndicate, the purpose of which is to ensure Pirelli & C. share structure stability, and an excerpt of the relevant agreement are listed at the end of this Report and are available on the website of the Company at www.pirelli.com.

h) Appointment and replacement of Directors

The Company bylaws[3] have provided that the Board of Directors is appointed by a slate system since 2004. This system ensures that – if more than one slate is presented – minority shareholders can elect one fifth of the Directors.

The slates presented by shareholders, undersigned by the parties submitting them, must be deposited[4] at the registered office of the Company at least fifteen days prior to the date set for the shareholders’ meeting to be held on first call and made available to anyone on request.

Each shareholder may present or participate in the presentation of only one slate and each candidate may appear on only one slate, on pain of ineligibility.

Only shareholders who, alone or together with other shareholders, hold at least 2 per cent of the share capital entitled to vote at the ordinary shareholders’ meeting, may present slates, or the lesser proportion required by regulatory provisions issued by CONSOB, subject to their proving ownership of the necessary number of shares not later than the date by which they must be deposited.

CONSOB[5] has determined the percentage shareholding required for presentation by the shareholders of the slates of candidates for election to the administration and control bodies of Pirelli & C for the 2008 financial year as 1.5% of the capital with voting rights in the ordinary shareholders’ meeting.

Declarations in which the candidates individually accept their candidacy and attest, on their own responsibility, that there are no grounds for ineligibility or incompatibility, and that they meet the requirements prescribed by law and the bylaws, must be deposited with each slate. The declarations must be accompanied by a curriculum vitae for each candidate regarding his personal and professional characteristics, indicating the administration and control appointments held by the candidate with other companies and his or her suitability to qualify as independent, according to legal and Company criteria.

Slates presented in violation of the above rule are considered null.

Each person entitled to vote may vote for only one slate.

The following procedure will be used for the election of the Board of Directors:

a) four fifths of the directors to be elected are selected in the progressive order in which they are listed on the slate that obtained the majority of the votes cast by the shareholders, rounding down to the nearest whole number;

b) the remaining directors are appointed from the other slates; for this purpose, the votes obtained by the slates will be divided by a sequence by whole numbers from one up to the number of directors that remain to be elected. The quotients thus obtained are assigned progressively to the candidates of each of the slates, in the order in which they are listed. The quotients attributed to the candidates of the various slates are arranged in a single list, in decreasing order. The persons with the highest quotients are elected.

If more than one candidate obtains the same quotient, the candidate from the slate that has not yet elected a director, or which has elected the fewest directors, is elected.

If no-one from these slate has yet elected a director, or if they have all elected the same number of directors, then within these slates candidate who obtained the highest number of votes is elected. If two candidates on a slate have the same number of votes, and the same quotient, then the entire shareholders’ meeting votes again and the candidate obtaining a simple majority of votes is elected.

For the appointment of directors not nominated according to the procedure described above for any reason, then the shareholders decide with the legal majorities.

If one or more directorships should become vacant during the financial year, the provisions of art. 2386 of the Italian Civil Code apply.

It should be noted that when the financial reports for the year ended on 31 December 2007 are to be approved[6], the extraordinary meeting of the shareholders will be asked to make some changes to the company bylaws[7]. In particular, in addition to some further changes, we propose to supplement the arrangements for the election of the Board of Directors by providing that, if the slate voting mechanism does not assure the minimum number of independent directors, the non-independent candidate with the highest progressive number in the list who has received the highest number of votes is replaced by the unelected independent candidate from the same list according to their progressive number on it, and so on, list by list, until the minimum number of independent directors has been achieved. The purpose of this change is essentially to ensure that the director appointment procedure guarantees that the minimum number of independent directors required by the law is present on the Board. As per international best practices, the renewal of the administrative body of the Company allows shareholders to vote on separate elections on: (i) the number of people on the Board of Directors; (ii) the election of Directors through a vote on the presented slates; (iii) the duration of the mandate of the Board of Directors; and (iv) the pay packages of the Directors.

i) Changes to the bylaws

Changes to the bylaws of the Company are deliberated as provided by the legal regulations.

l) Powers to increase share capital and authorisations to purchase own shares[8]

In a deliberation an extraordinary shareholders’ meeting on 7 May 2003, the Directors were given the right to issue, in one or more tranches, up to a maximum of 100,000,000 ordinary shares by 30 April 2008, to be assigned to managers and directors of the company, its subsidiaries or their subsidiaries, in Italy or abroad, pursuant to articles 2441 subsection eight of the Civil Code and article 134 of the FSA. On 25 February 2005, the Board of Directors, in partial execution of the powers attributed to it by the extraordinary shareholders’ meeting of 7 May 2003, deliberated to increase the share capital for a maximum of Euro 15,725,496.50 par value, by the issue of a maximum of 54,225,850 ordinary shares of 0.29 euros par value, at a price of 0.996 euros each, of which 0.706 as share price premium, to be reserved for subscription by managers and executives of the company, its subsidiaries and their subsidiaries, in Italy and abroad.

In a deliberation made by an extraordinary shareholders’ meeting on 11 May 2004, the Directors were given the right to increase the share capital by payment, by 10 May 2009, in one or more operations, up to a total sum of 600 million euros par value, with or without share premium, by issuing a maximum of 2,068,965,517 ordinary shares to be offered in option to shareholders and holders of convertible bonds, with the possibility of excluding the right to option pursuant to the combined provisions of art. 2441, last subsection, of the Civil Code, and article 134, subsection two of the FSA, where the shares are offered for subscription by the employees of Pirelli & C. or its subsidiaries.

By a deliberation made by the extraordinary shareholders’ meeting of 11 May 2004, the Directors were given the right to issue convertible bonds in both ordinary and savings shares, or with warrants valid for the subscription of such shares to be offered as options to shareholders and holders of convertible bonds, for a maximum nominal sum of 1,000 million euros, before 10 May 2009, in one or more operations, within the limits permitted at the time of issue by the current regulations, with a consequent possible increase in share capital to serve the conversion of the bonds and/or the exercise of the warrants.

At the date of approval of this report, the Board of Directors had not made use of the last two powers mentioned above.

The deliberations to increase the share capital that may ultimately be made by the Board of Director in exercising its rights as attributed above must set the subscription price (including any share premium) and the corresponding term within which the shares may be subscribed. It may also specify that, if the deliberated increase should not be wholly subscribed within the period of time set, the capital will be increased by a sum equal to the subscriptions collected at the end of said period.

At the date of this report, the Company holds 2,617,500 of its own ordinary shares and 4,491,769 of its own savings shares.

In its meeting on 26 March 2008, the Board of Directors deliberated to propose to the shareholders’ meeting[9] that the Board of Directors should be authorised to purchase and sell its own shares within the limits specified in the current regulations.. For more detail, see the Directors’ Report for this operation, which will be made available on the company website www.pirelli.com.

m) Change of control clauses

There are no subjects which may, directly or indirectly, also by virtue of shareholder agreement, individually or jointly with other persons included in these agreements, exercise control over Pirelli & C..

It follows that, this being the case, no change of control of the company can occur.

n) Directors’ indemnity in case of resignations, termination or cessation of appointment after a public takeover bid

The Company has not stipulated agreements with its directors that envisage indemnities in case of resignations or termination/cancellation of appointments without good reason or if the employment relationship ceases after a public takeover bid.

3. COMPLIANCE

Since it was first issued, Pirelli & C. has adhered to the self-regulatory code of the Italian Stock Exchange (published in July 2002) and in the Board meeting held on 12 March 2007 it formalized its adhesion to the new self-regulatory code for listed companies (published on March 2006).

As mentioned, the Company is aware of the importance of its Corporate Governance system in fulfilling its objective of creating value for all shareholders and making progress in sustainable development, and thus induces the Company to keep its own corporate governance system constantly in line with national and international best practices, and with legislative changes.

At the date of approval of this Report non-Italian legal provisions that influence the corporate governance structure of the Company do not apply to Pirelli & C..

4. DIRECTION AND COORDINATION ACTIVITIES

There are no subjects which may directly or indirectly, also by virtue of shareholder agreement, individually or jointly with other persons included in these agreements, exercise control over Pirelli & C..

Moreover, the Company is not subject to direction and coordination activities by any company or body pursuant to article 2497 and subsequent articicles of the Civil Code.

In contrast, Pirelli & C., which heads the Group of that name, exercises direction and coordination activities pursuant to the provisions of the Italian Civil Code over many companies, having published appropriate information about these matters pursuant to article. 2497-bis of the Civil Code.

It should be noted that, while the Company controls Pirelli RE, a company listed on the Milan stock exchange, pursuant to article 2359 of the Civil Code, consolidates its results, and held over 50% of the voting capital at the date of approval of this Report, it does not exercise direction and coordination activities over it, since there is no evidence to show that it has any effective impact on the management of this subsidiary, and this is also confirmed in the section “Role of the Board of Directors”, para.“Transactions with significant impact on the strategy, the profitability, the assets or the financial position of the Company”. Formal evidence for this assessment has been provided by the Boards of Directors of both Pirelli and of Pirelli RE.

5. BOARD OF DIRECTORS

In line with Italian regulations for the traditional direction model, the management of the Company in guiding its strategy and controlling its operations, with the power to direct its overall management and intervene directly in a series of decisions that are necessary or useful in the pursuit of its corporate aims is entrusted to the Board of Directors.

To carry out its duties the Board of Directors relies on the support provided by specific Board subcommittees composed entirely of independent directors.

5.1. Composition

The Board of Directors of the Company, as established by the bylaws, consists of no less than seven and no more than twenty-three members, who serve for three years (unless a lesser period is specified by the shareholders’ meeting at the act of their appointment) and may be re-elected.

The Board of Directors in office on 31 December 2007 consists of twenty members and was appointed by the shareholders’ meeting of 28 April 2005 for three financial years to expire on approval of the financial reports for the year ending 31 December 2007[10].

By voting on a slate[11] the minority shareholders were able to nominate four Directors, i.e. one fifth of the total number (specifically, Carlo Angelici, Franco Bruni, Mario Garraffo and Aldo Roveri).

Two lists were presented at the shareholders’ meeting on 28 April 2005, one by the participants in the Pirelli & C. S.p.A. Share Block Syndicate and the other by various savings management companies. Those proposing the slates made the candidates’ profiles available so that the candidates’ personal and professional characteristics, as well as some candidates’ qualifications as independents, were made known prior to voting. The curricula vitae presented when the slates were filed were promptly published on the Governance section of the company website, www.pirelli.com, where they remain available in an updated version.

During 2007 some changes were made to the composition of the Board. Specifically, the appointment of Alberto Bombassei, co-opted by the Board of Directors on 12 September 2006, was confirmed by the shareholders’ meeting on 23 April 2007, and Luigi Roth was appointed, restoring the number of serving Directors to twenty (at the end of 2006, following the resignation of Managing Director Carlo Buora, the Board of Directors, given the imminent shareholders’ meeting, decided not to proceed to co-opt any other directors, but to refer all decisions on this issue to the shareholder meeting). Finally, the shareholders’ meeting of 12 December 2007 confirmed the appointment of Enrico Tommaso Cucchiani, coopted to the Board of Directors in the meeting of 26 July 2007, as Director in place of Paolo Vagnone, who resigned his directorship on 20 July 2007.

The composition of the Board of Directors at the date of approval of this Report is indicated below:

Name

Office

Appointed on

Slate

Exec.

Nonexec.

Indep.

Indep. FSA

% BDM

Marco Tronchetti Provera

Chairman

04/28/2005

Maj.

X

100

Alberto Pirelli

Deputy Chairman

04/28/2005

Maj.

X

89

Carlo Alessandro Puri Negri

Deputy Chairman

04/28/2005

Maj.

X

100

Carlo Acutis

Director

04/28/2005

Maj.

X

X

X

67

Carlo Angelici

Director

04/28/2005

Min.

X

X

X

100

Gilberto Benetton

Director

04/28/2005

Maj.

X

67

Alberto Bombassei

Director

09/12/2006*

**

X

X

X

78

Franco Bruni

Director

04/28/2005

Min.

X

X

X

89

Enrico Tommaso Cucchiani

Director

07/26/2007*

**

X

67

Gabriele Galateri di Genola

Director

04/28/2005

Maj.

X

100

Mario Garraffo

Director

04/28/2005

Min.

X

X

X

100

Dino Piero Giarda

Director

04/28/2005

Maj.

X

X

X

89

Berardino Libonati

Director

04/28/2005

Maj.

X

X

X

56

Giulia Maria Ligresti

Director

04/28/2005

Maj.

X

100

Massimo Moratti

Director

04/28/2005

Maj.

X

78

Giovanni Perissinotto

Director

04/28/2005

Maj.

X

78

Giampiero Pesenti

Director

04/28/2005

Maj.

X

X

X

56

Luigi Roth

Director

04/23/2007

***

X

X

X

83

Aldo Roveri

Director

04/28/2005

Min.

X

X

X

89

Carlo Secchi

Director

04/28/2005

Maj.

X

X

X

100

LEGEND

* Alerto Bombassei and Enrico Cucchiani have been appointed directors pursuant to article 2386 subsection 1 of the Civil Code. The Directorship of Mr. Bombassei was confirmed by the Shareholders’ Meeting on 23/04/2007, and that of Mr. Cucchiani on 12/12/2007

** It should be noted that since the appointment was confirmed after an appointment pursuant to article 2386 subsection 1 of the Civil Code, the voting slate mechanism was not applicable.

*** Appointed by the shareholders’ meeting on 23 April 2007. In this case the voting slate mechanism was not applicable, pursuant to the Company bylaws.

Slate: Maj/Min according to whether the director was elected from the majority or minority slates (art. 144-decies of the Consob Issuer Regulations)

Exec. if checked indicates that the director is an executive director

Non-exec. if checked indicates that the director is a non-executive director

Indep. if checked indicates that the director is independent according to the criteria contained in the Self Regulatory Code.

Indep. FSA: if checked indicates that the director possesses the attributes of independence specified in art. 148, subsection 3 of the FSA (art. 144-decies of the Consob Issuer Regulations)

% BDM indicates the percentage of Board meetings attended by the director (in calculating this percentage for Directors Cucchiani and Roth, this was calculated from the number of meetings they attended in relation to the number of Board meetings held after their appointment)

In accordance with the provisions of the Self Regulatory Code[12], the positions occupied by the Directors in major companies other than Pirelli Group companies are listed at the end of the Report..

Name

Office

R.C.

% R.C.

CCI

% C.I.C.C.G.

Carlo Angelici

Member

X

100

Franco Bruni

Member

X

100

Berardino Libonati

Chairman

X

100

  

Giampiero Pesenti

Member

X

100

  

Aldo Roveri

Member

X

100

  

Carlo Secchi

Chairman

X

100

LEGEND

R.C. indicates the Remuneration Committee

% R.C.: indicates the percentage of meetings of the Remuneration Committee attended by the director

C.I.C.C.G.: indicates the Committee for Internal Control and Corporate Governance

%. C.I.C.C.G.: indicates the percentage of meetings of the Committee for Internal Control and Corporate Governanceattended by the director

The directors who ceased to hold office during the year are listed below:

Name

Office

Served from/to

Slate

Exec.

Non exec.

Indep.

% BDM

Paolo Vagnone

Director

From 04/28/2005 to 07/20/2007

Maj.

X

80

LEGEND

Refer to the legend for the two preceding tables
Maximum accumulation of directorships in other companies

By deliberation of the Board of Directors on 9 November 2007, fully implementing the Self Regulatory Code[13] it has been established that serving as a director or authotiry of more than five companies other than those directed and coordinated by Pirelli & C S.p.A, or controlled or affiliated to such companies, is not considered compatible with serving as a director of the Company, when the companies are (1) listed companies included in the S&P/MIB index (or equivalent foreign indices), or (ii) companies operating prevalently in the retail finance sector (members of the lists specified in article 107 of legislative decree no. 385 of 1 September 1993) or (iii) companies that undertake banking or insurance activities. Moreover, it is not considered compatible for a director to hold more than three executive positions in companies described in (1), (ii) or (iii).

Offices held in more than one company in the same group are considered a single office, and executive positions prevail over non-executive ones.

The Board of Directors retains the right to form a different opinion, and this will be made public in the annual report on corporate governance, together with the congruent grounds for doing so.

The positions occupied by the Directors in major companies other than Pirelli Group companies are listed at the end of the Report..

After investigation by the Committee for Internal Control and Corporate Governance, the Board of Directors, in its meeting of 26 March 2008, examined the offices held and reported by the individual Directors and determined that all Directors hold appointments that are compatible with the execution of their office of Director of Pirelli & C according to the policy on this issue adopted by the Company.

Shareholders who, pursuant to the bylaws, intend to present slates for the composition of the Board of Directors, are invited to examine this document.

The “policy of the Board of Directors on the maximum number of appointments considered compatible with effective service as a director of the Company” is appended at the end of this Report and is also available in the Governance section of the company website, www.pirelli.com.

5.2. Role of the Board of Directors

The Bylaws do not specify a minimum interval between Board meetings. The Company has circulated a calendar[14] that schedules 4 meetings for 2008, specifically:

  • 26 March 2008 to examine the budget and consolidated financial reports for the year ended on 31 December 2007
  • 9 May 2008 to examine the intermediate report on operations for the first quarter of 2008;
  • 5 August 2008 to examine the abbreviated half-yearly financial report;
  • 7 November 2008 to examine the intermediate report on operations for the third quarter of 2008.

Moreover, after its renewal by the Shareholders’ Meeting[15], the newly-appointed Board of Directors will meet for the deliberations consequent on the appointment..

The Board meetings may take place by means of telecommunication systems enabling participation of all parties concerned, with equal information, in the debate.

The Board of Directors meetings are convened by means of letter, telegram, fax or e-mail sent at least five days prior (or, in the event of emergencies, at least six hours prior) to the meetings to each Director and Acting Auditor.

Barring exceptional cases, the Directors and the Auditors have always received the necessary documentation and data with reasonable notice in order to express their informed opinion on the matters submitted to their examination.

During the 2007 financial year there were 9 meetings of the Board of Directors, with an average duration of approximately one and a half hours each; the mean percentage attendance by directors was around 85%, and the independent Directors attended an average 82% of meetings.

The Lead independent director attended all meetings of the Committee for Internal Control and Corporate governance (which he Chairs), all meetings of the Board of Directors, the two shareholders’ meetings that were held during the 2007 financial year, and the special meeting of savings shareholders.

At the date of approval of the Report, there had been 2 meetings of the board.

Functions of the Board of Directors

As stated, the Board of Directors plays a central role in the corporate governance system of the Company; it has the power (and the duty) to direct Company business, pursuing and fulfilling its primary and ultimate objective of creating shareholder value.

Pursuant to the bylaws[16], the Board is responsible for the management of the Company and, to this end, it is vested with the broadest powers, except for those matters remitted by law or the bylaws to the authority of the shareholders’ meeting.

The Board of Directors, also in accordance with the recommendations of the Self Regulatory Code[17]:

  • examines and approves the strategic, industrial and financial plans of the Company and the Group;
  • formulates and adopts the rules for the corporate governance of the Company, and defines the group governance guidelines;
  • evaluates the adequacy of the general organisational, administrative and accounting structure of the Company as well as of those subsidiaries of strategic importance as set up by the Managing Directors, with special reference to internal auditing and the management of conflicts of interests;
  • grants powers to the Managing Directors and the Executive Committee (if established) and revokes them; fixing their limits, the manner in which they have to be exercised and the frequency, at least quarterly, on which such bodies must report to the Board on the activity performed in the exercise of the powers granted to them;
  • determines, after having examined the Remuneration Committee proposals and consulted the Board of Statutory Auditors, the remuneration of the Managing Directors and of those directors who are vested with special offices and, if the shareholder meeting has not already resolved upon it, allocates the total remuneration to which the members of the Board of Directors are entitled;
  • evaluates the general performance of the Company, taking particularly into consideration the information received from the delegated bodies, and periodically compares the results achieved with those planned;
  • examines and approves in advance all operations involving the Company and its subsidiaries which have a significant impact on the strategy, the profitability, the assets or the financial position of the Company, paying particular attention to situations in which one or more directors act in their own interest or in the interest of third parties, and more generally to transactions with related parties. During the revision of the corporate governance instruments, it was expressly stated that the Board of Directors establish general criteria for the detection of these kinds of operation;
  • at least once a year, evaluates the size, composition and functioning of the Board itself and its Committees, expressing opinions on the professional figures whose presence in the Board could be deemed advisable;
  • constitutes the Supervisory Body pursuant to legislative decree no. 231/2001;
  • appoints and dismisses the internal control officer and determines her/his duties and remuneration, after having received the opinion of the Committee for Internal Control and Corporate Governance and the Board of Statutory Auditors; reviews and approves periodic reports prepared according to applicable legislation;
  • exercises the other powers and fulfils those duties attributed to it by the law and the Company bylaws.
Evaluation of the general results of operations[18]

Pursuant to the bylaws[19] and the current regulations[20], the Board of Directors has evaluated the general results and likely development of operations at at least quarterly intervals.

Please also refer to the paragraph headed “Information to the Board” in the “Delegated Bodies” section.

Internal control system and governance system[21]

The Board of Directors has assessed[22] the adequacy of the internal control system and, more generally, the governance of the Company and of the Group it controls, at six monthly intervals..

In this respect it should be noted that recently the Board of Directors, in its meeting on 26 March 2008, adopting the considerations made by the Committee for Internal Control and Corporate Governance, evaluated the adequacy of the general organisational, administrative and accounting structure of the Company, and expressed a positive opinion of the internal control system and, more generally, of the governance system of the Company and the Group[23]

Remuneration of the directors vested with special responsibilities[24]

The Board has examined and approved the Committee’s proposal for the remuneration of the General Managers of the Company and has been informed of the remuneration of the Managing Director and General Manager of Pirelli Tyre[25].

Given the ending of its mandate, the Board did not deliberate on the variable remuneration package of directors vested with special responsibilities for the 2008 financial year, referring all determinations on this matter to the new Board.

See section 10 “Remuneration of directors” for all issues related to remuneration.

Transactions with significant impact on the strategy, the profitability, the assets or the financial position of the Company[26]

The “Procedure for information flows to Directors and Auditors”, appended at the end of this chapter, available in the Governance section of the company website, www.pirelli.com, specifies that the general information on the activities carried out should be accompanied by specific detailed information on, among other matters, transactions with significant impact on the profitability, assets or financial position of the company, identified using qualitative criteria and quantitative thresholds.

Moreover, the Board, without prejudice to the responsibilities and powers reserved to it by the law, bylaws, powers structure and internal procedures, has also specified that it is the Board of Director’s responsibility to give prior approval to certain non infragroup operations and actions (determined on the basis of the latest qualitative criteria and further quantitative thresholds) when carried out by Pirelli & C or by unlisted foreign companies subject to the direction and coordination of Pirelli & C..

Thus the transactions of Pirelli RE (a listed company not subject to the direction and coordination[27] of Pirelli & C.) and the companies directed and coordinated by Pirelli RE are not subject to the prior approval of the Board of Directors of Pirelli & C.

Transactions with related parties

For transactions with related parties, see the section entitled “Interest of the directors and transactions with related parties”.

Board performance evaluation[28]

During 2006, for the first time, the Board of Directors made a self-evaluation of its performance (officially called a “Board performance evaluation”), thus adhering to international best practices and the provisions in the Self-Regulatory Code[29].

As proposed by the Committee for Internal Control and Corporate Governance, and based on suggestions made by the independent directors[30], and taking the positive experience of the preceding year into account, the Board concluded that it would be advisable to start a similar Board self-evaluation for the 2007 financial year, inverting the process used the previous year. The self-evaluation process occurred by direct interviews with individual Board members or, alternatively, allowing Board members to provide written answers to a questionnaire which was also used as a guide for the interviews. The self-evaluation was carried out with the assistance of a major consultancy company that worked alongside the Committee for Internal Control and Corporate Governance to develop self-evaluation methods and to analyse the results.

Directors were invited to express their opinions on three major themes:

  • the board performance evaluation: including, among other aspects, the size, composition and operation of the Board and its Committees;
  • the directors’ evaluation: including, among other aspects, the participation, knowledge of the Company, knowledge of regulatory developments and independence of opinion of the executive directors, non-executive and non-independent directors and independent directors;
  • the self-evaluation: including, among other aspects, an evaluation by each individual director of the issues considered in the directors’ evaluation of their own participation, knowledge of the Company, knowledge of regulatory developments and independence of opinion.

The Directors interviewed had an opportunity to express four degrees of opinion and to formulate their own comments.

The results were subject to in depth analysis by the Committee, and then examined by the Board of Directors in its meeting of 26 March 2008.

The Directors expressed a high degree of participation in the self-evaluation board performance evaluation and the examination of the results showed the emergence of a decidedly positive impression.

This second edition of the board performance evaluation confirmed the participation in and satisfaction of the Directors with their Board.

Article 2390 Civil Code

Article 10, last subsection of the bylaws provides that, unless otherwise deliberated by the shareholders’ meeting, the directors are not bound by the prohibition contained in article 2390 of the Civil Code.

5.3. Delegated bodies

Chairman

Where the Shareholders’ Meeting has not done so, the Board of Directors appoints its Chairman. Specifically, the Board of Directors appointed Marco Tronchetti Provera as Chairman of the Board of Directors in its meeting of 28 April 2005.

The Chairman is recognised as the legal representative of the Company, empowered to perform any action pertinent to corporate activity in its various manifestations.

The Board of Directors has identified the limits to the powers it confers, which have been defined as the inner limits of the relationship between the delegating body of the Board and the subject with delegated powers. In particular, the following inner limits have been identified for the Chairman: the power to guarantee Company and subsidiary bonds having individual values of more than 25 million euros, or for third parties regarding bonds with individual values of more than 10 million euros (in the latter cases another Managing Director must co-sign with the Chairman);

Furthermore, the Board confirmed that the Chairman, Marco Tronchetti Provera, should exercise the following organizational functions:

  • relations with shareholders and the information provided to them;
  • coordination of the Managing Directors’ activities;
  • formulation, in agreement with the Managing Directors, of the general strategies and development policy for the Company and the Group, to be submitted to the Board of Directors together with extraordinary corporate actions;
  • proposals, to be submitted to the Board of Directors in agreement with the Managing Directors, for the appointment of members of the General Managers’ Departments and, after consulting the Remuneration Committee, for their compensation;
  • chairmanship of the managing committees with strategic functions;
  • all forms of communication to the market, with the right to delegate to the managing directors, in accordance with what is covered by the procedure for the management and communication to the market of sensitive information, as approved by the Company;
  • the right to acquire from the Managing Directors and the management of the Group all the data and information considered necessary to carry out the above-mentioned functions.
Managing Directors and other Managers

Powers pertaining to their specific functions, subject to certain quantitative limits, have been granted to Claudio De Conto, Chief Operating Officer, and to Luciano Gobbi, Chief Finance and Strategic Planning Officer[31].

Less broad powers have been granted to other managers of the Company to be used in their individual spheres of competence.

As in the past, in 2007 the Chairman, the Managing Directors, the General Managers and the Managers used their delegated powers only for the ordinary management of the activities of the Company (in regard to which the directors were periodically informed) and submitted the transactions which were more important from an operational or financial perspective to the Board of Directors.

In fact, delegation does not mean the assignment of exclusive powers but is rather the solution adopted by the Company to ensure, in terms of the organization of the senior management team, the greatest degree of operational flexibility, both within the Company and in relation to third parties.

Information to the Board

Pursuant to Article 11 of the bylaws and the prescriptions of Article 150, subsection 1 of the FSA, the Board of Directors and the Board of Statutory Auditors are kept informed, inter alia by the persons with delegated powers, about the performance of the Company, its general management, its prospects and the transactions of greatest significance for its profitability, financial position or assets and liabilities carried out by the Company or its subsidiaries; in particular, such persons report any transactions in which they have an interest, for their own account or on behalf of third parties, or that are influenced by the person, if any, who performs management and coordination activities. Such reports are made promptly and at least once every three months, on occasion of the Board of Directors meetings (and the Executive Committee, if established) or by means of a written communication.

In order to favour the orderly organization of the flow of information, in July 2002, the Company adopted a procedure with the rules to be followed to ensure compliance with the above-mentioned Article 150 with regard to the activities of the executive directors, both in exercising their delegated powers and in carrying out the transactions approved by the Board of Directors.

This procedure has been subject to a review that involved Company governance frameworks. The Board of Directors meeting on 12 March 2007 actually decided to adopt a general procedure on information flows to the Directors and Auditors, which incorporates more widely the procedure adopted to fulfil the obligations of art. 150 of the Financial Services Act. The new procedure aims at regulating and coordinating the various types of data flowing to Directors and Auditors, so that they all have the common aim of continuously making available to the members of these Boards the data needed to properly fulfil their directional, policy and control responsibilities.

The text of this new policy, shown at the end of this reportis also available on the website of the Company at www.pirelli.com, under the section entitled “Governance”.

5.4. Other executive Board Members

The Board of Directors has considered the Chairman of the Board of Directors, Marco Tronchetti Provera, and the two Vice Chairmen, Carlo Alessandro Puri Negri (also Vice Chairman and Managing Director of subsidiary Pirelli RE) and Alberto Pirelli (also director and manager of a business unit of subsidiary Pirelli Tyre and director of other subsidiaries of Pirelli Tyre) to be executive directors.

During the year, in accordance with the recommendations of the Self Regulatory Code[32], to extend the knowledge of all directors about the reality and dynamics of the company, a visit was organised to Modular Integrated Robotized System (MIRS) to better understand all the phases of the tyre production cycle from raw material to finished product..

5.5. Independent Directors

The Board of Directors of the Company evaluate the requisites for independence specified in the Self Regulatory Code and the FSA for non-executive directors qualified as independent upon their appointment and during their mandate.

In the light of a substantial evaluation of the information provided by the Directors and that available to the Company, the Board of Directors confirmed, in the Board meeting on 26 March 2008, that the eleven directors who, on appointment, were qualified as independent (Carlo Acutis; Carlo Angelici; Alberto Bombassei; Franco Bruni; Mario Garraffo; Dino Piero Giarda; Berardino Libonati; Giampiero Pesenti; Luigi Roth; Aldo Roveri and Carlo Secchi), continue to maintain these requisites. A further six Board members (Gilberto Benetton; Enrico Tommaso Cucchiani; Gabriele Galateri di Genola; Giulia Maria Ligresti; Massimo Moratti; Giovanni Perissinotto) could be qualified as non-executive members. It follows that the percentage of independent directors on the Board as currently composed is 55%. It should also be noted that the Board of Directors has ascertained that all directors who can be qualified as independent are also independent in terms of the requisites of the FSA for members of the Board of Statutory Auditors.

In accordance with the recommendations of the Self Regulatory Code[33],the Board of Statutory Auditors has checked that the criteria and ascertainment procedures adopted by the Board to assess the independence of its members are correctly applied.

The Board of Directors performed this evaluation based on the most rigorous requirements in the Self Regulatory Code[34] which states that a director may not – by law – be considered independent:

a) if they, directly or indirectly or on behalf of subsidiaries, trust companies or through third parties, control the issuer or are able to exercise considerable influence on said issuer, or are a participant in a shareholder agreement through which one or more subjects can exercise control or significant influence on the issuer;

b) if they have or have been in the past three financial years a prominent exponent[35] of the issuer, or one of its strategic subsidiaries or a company under joint control with the issuer, or a company or a body that, alone or together with others in accordance with shareholders agreements, control the issuer or are able to exercise considerable influence on said issuer;

c) if directly or indirectly (e.g. through subsidiaries or bodies of which they are a significant exponent, or as a partner in a law firm or a consultancy company) they have, in the previous financial year, had a close business, financial or professional relationship with the following:

— the issuer, one of its subsidiaries, or any related prominent exponent thereof;

— a subject who, alone or together with others within a shareholder agreement, controls the issuer, or – in the case of a company or body – with their significant exponents ;

— or is or has been within the previous three financial years, an employee of one of the above-mentioned subjects ;

d) they receive, or have received in the past three financial years, from the issuer or one of its subsidiaries or parent companies, a substantial bonus in addition to their “fixed” salary as non-executive director of the issuer, including performance-based incentive plans, such as stock bonuses or other;

e) if they have been a director of the issuer for more than nine years of the past twelve;

f) if they are an executive director in another company in which the executive director of the issuer holds the role of director;

g) if they are a partner or director of a company or body belonging to the company mandated to audit the accounts of the issuer;

h) if they are a close family member of a person in one of the situations described above.

Meetings of the independent directors

Durng the financial year, in line with the recommendation of the Self -Regulatory Code[36], the independent directors met twice in the absence of the other directors. The topics of the meetings were matters inherent to the corporate governance system of the Company (specifically, the in-depth consideration of the board evaluation), the role of the independent Directors, the valuation in the balance sheet of the Company investment in Olimpia S.p.A.

During 2008, one meeting of the independent directors has already been held.

5.6. Lead independent director

As of November 2005, in order to increase further the role of the independent directors, the Board of Directors decided to introduce a Lead Independent Director.

The Lead Independent Director (Carlo Secchi, the Chairman of the Committee for Internal Control and Corporate Governance, was chosen) coordinates and acts as a point of reference for the requirements and contributions of the independent Directors.

The Lead Independent Director may also convene – on his own initiative or upon the request of other Directors – specific meetings solely for independent Directors in order to discuss subjects occasionally felt to be of interest to the functioning of the Board of Directors or management of the firm. Please note that the Lead Independent Director may collaborate with the Chairman of the Board of Directors for the better functioning of the Board of Directors.

The Lead independent director attended all meetings of the Committee for Internal Control and Corporate governance (which he Chairs), all meetings of the Board of Directors, the two shareholders’ meetings that were held during the 2007 financial year, and the special meeting of savings shareholders.

6. HANDLING OF COMPANY INFORMATION

6.1 Internal management and disclosure of documents and information

Market transparency, clarity, correctness and integrity of information are the values that are upheld by the conduct of the corporate bodies, the management and all the employees of the Pirelli Group. In March 2006, the Board of Directors of the Company adopted a specific procedure for the management and market communication of sensitive information that, keeping account of the regulations regarding market abuse, governs the management of sensitive information connected to Pirelli & C., its unlisted subsidiaries and the listed financial instruments of the Group, and as such all the members of corporate bodies such as the employees and collaborators of companies external to the Group that may have access to information that could evolve into sensitive information.

This procedure also applies as instructions to all subsidiaries in order to obtain from them, without hesitation, the necessary information for the timely and proper fulfilment of financial reporting obligations. The Procedure also disciplines the institution of a register of persons with access to confidential information, in operation since 1 April 2006.

The text of this procedure shown at the end of this Report, is also available on the website of the Company at www.pirelli.com, under the section entitled “Governance”.

6.2 Insider dealing

Matters regarding the transparency of transactions on Company shares or financial instruments underlying or linked to shares made directly or by third parties for relevant persons or by persons closely related or linked to them (i.e. insider dealing) are currently fully governed by law and by regulations established by Consob (art. 114 of the Financial Services Act and art. 152-sexies and following amendments of the Issuer's Regulation), as of April 1st, 2006 over-riding the Code of Conduct of the Company regarding insider dealing, adopted as from December 2002.

Pursuant to the law, Directors and statutory auditors of the issuing Company, as well as “persons who carry out administrative [...] functions in an issuing company and managers that have regular access to sensitive information [...] and have the power to make management decisions that could affect the performance and the future prospects of an issuing company…” are obliged to disclose to the market any insider dealing transactions made on Company shares or financial instruments linked to these shares having a value of more than Euros 5,000 annually. The Company opted to identify these managers as its General Managers, and – as an example of self-regulation – the Managing Director and General Manager of the subsidiary Pirelli Tyre S.p.A. (who was the Managing Director of the Company until 30 June 2006). Similar disclosure obligations have also been undertaken by Pirelli RE., a company that is also listed on regulated markets.

Within the more general auditing process for the corporate governance instruments, despite being not obliged by law, the Board of Directors decided to institute a black out period for the persons mentioned above who must adhere to insider dealing regulations; they shall therefore abstain from making transactions on Company shares or on financial instruments linked to these shares. These periods may moreover be extended or suspended by the Board of Directors in exceptional cases.

The text of this procedure shown at the end of this Report, is also available on the website of the Company at www.pirelli.com, under the section entitled “Governance”.

7. BOARD COMMITTEES

The Board of Directors has instituted two subcommittees: the Committee for Internal Control and Corporate Governance and the Remuneration Committee.

8. APPOINTMENTS COMMITTEE

The Board of Directors has decided not to establish committee charged with nominating candidates for the position of Director, since at present the conditions envisaged by the Code for its establishment do not exist, because of the current ownership structure and, above all, the By-laws provision for the slate system, in view of the transparency this mechanism ensures in the selection of candidates.

Since the Board considers the above arguments are still valid, it has not felt that the constitution of a specific elections committee is necessary. Moreover, it has given the Committee for Internal Control and Corporate Governance the power to identify candidates to propose to the Board in the event that an independent Director replaced pursuant to article 2386, subsection 1 of the Civil Code.

9. REMUNERATION COMMITTEE

The Board established the “Remuneration Committee”, a subcommittee from among its members, charged with fact-finding and advisory functions, in 2000.

In full compliance with the provisions of the Self-Regulatory Code[37], the Remuneration Committee is composed exclusively of independent Directors:

  • Berardino Libonati (Chairman);
  • Giampiero Pesenti
  • Aldo Roveri

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

The meetings of the Remuneration Committee are regularly minuted by the secretary and the minutes are transcribed into a specific register[38].

Functions of the Remuneration Committee

The Board of Directors, in its meeting on 12 March 2007, acted to adapt the tasks of the Remuneration Committee as specified in the Self-Regulatory Code.

The function of the Remuneration Committee is to investigate and consult on the following matters, and specifically:

  • to formulate proposals to the Board regarding the remuneration of the Managing Directors and those persons who hold certain offices to ensure that they align with the objective of shareholder value creation in the medium-long term;
  • to periodically evaluate the remuneration criteria for the senior management of the Company and, as requested by the Managing Directors, formulate proposals and recommendations, with specific reference to the adoption of possible stock option plans or stock bonuses;
  • to monitor the application of the decisions made by the competent bodies and company policies regarding top management compensation.

The Committee – which may also request the assistance of external consultants in fulfilling its mandate – meets whenever its Chairman deems it appropriate or when a meeting has been requested by another member of the committee or by a Managing Director. The Board of Statutory Auditors or, if deemed appropriate, other Company and/or Group representatives attend the meetings of the Committee.

In line with the recommendations of the Self Regulatory Code[39], directors vested with special officers do not attend Remuneration Committee meetings..The available information and documents required for informed deliberation of the material submitted to the committee have always been circulated to all members reasonably in advance.

The Committee has full independence of expense for the performance of its tasks.

The Committee also has the right[40] to access information and company departments as necessary for the execution of the tasks allocated to it, making use of the support of the Secretary of the Board of Directors..

During 2007, the Remuneration Committee held a single meeting, attended by all members, during which it examined – and presented to the Board – the pay packages of the Chairman and the General Managers, also disclosing the criteria underlying its decisions. The Committee was also informed about the decisions made by Pirelli Tyre concerning the compensation of the Managing Director and General Manager, Dr. Francesco Gori, and the adoption of a system of 2007/2008 Long Term Cash Incentive for the Senior Management of the Pirelli Tyre Group.

The Remuneration Committee has already met twice in 2008, in order, among other things, to formulate its proposals for the attribution of compensation to the Managing Directors of the Company for the 2008 financial year, postponing the pay package of those directors who, after the renewal of the Board, are vested with special offices for the consideration of the “new Remuneration Committee”.

10. REMUNERATION OF DIRECTORS

In addition to reimbursement for expenses incurred in performing their duties, Directors receive annual fees determined by the shareholders’ meeting[41].

The meeting of 28 April 2005 decided “to establish a maximum of 1,200,000 euros as the total annual compensation of the Board of Directors pursuant to Art. 2389, subsection 1, of the Civil Code, said amount to be distributed among its members in accordance with the decisions taken in this regard by the Board.”

At the same meeting, on 28 April 2005, the Board of Directors established the distribution of the compensation as follows:

  • 50,000 euros per annum for each of the members of the Board of Directors;
  • 25,000 euros per annum for each of the members of the Committee for Internal Control and Corporate Governance;
  • 20,000 euros per annum for each of the members of the Remuneration Committee,

reserving the right to use the residual amount (65,000 euros) in the future, to give the Board a margin of organizational flexibil