Corporate Governance Report 2008 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. and available on its website www.borsaitaliana.it.

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 10 March 2009 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 2008 to which this Report refers.

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, VAT number and Milan Business Registry no. 02473170153.

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

Stock Exchange Regulations: indicates the Market Regulations organised and managed by Borsa Italiana S.p.A.

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

Market Regulations: indicates the Regulations issued by CONSOB with deliberation no. 16191 of 2007 on the subject of markets.

Report: indicates this report on the corporate governance and share capital, drafted pursuant to articles 123 bis of the FSA, 89 bis of the Issuer Regulations and article IA.2.6. of the Stock Exchange Instructions.

Company: indicates Pirelli & C.

Company bylaws: indicates the bylaws of Pirelli & C., available on the company internet site www.pirelli.com and printed at the end of this Report.

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

1. PROFILE OF THE COMPANY ISSUING THE REPORT

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 the industry.

In the tyres sector it operates Pirelli Tyre, the fifth largest manufacturer 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 has developed a major property business in Germany. It has a marginal presence in Poland.

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, renewable energy sources and sustainable mobility, now supported by the new antiparticulate filter business.

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

Awareness of the importance of an efficient Corporate Governance system in fulfilling its objective of creating value induces the Company to keep its corporate governance system constantly in line with national and international best practice.

Pirelli adopts the traditional administration and control system based on the central role played by the Board of Directors. The Company Governance model is based 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 regulation of potential conflicts of interest and on a rigorous code of conduct for transactions with related parties.

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

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

It should be noted that the Company voluntarily 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 TUF) at 10/03/2009

a) Structure of the share capital

The Share capital is divided into ordinary shares and savings shares each of 0.29 euros par value: 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 (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 the right of 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 ordinary and savings shares are excluded from trading.

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 of up to seven percent of their par value. If in a financial year the savings shares are assigned a dividend of less than seven percent of their par value, the difference is added to the preference dividend in the two following financial years. The profits remaining after the dividend specified above has been assigned to the savings shares are allocated to all the shares in such a way that the savings shares receive a dividend that is two percentage points of their par value higher than that of 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.

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 for 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 were found to 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 drafted in September 2007 pursuant to art. 84 bis of the Consob Issuer Regulations available in the Governance section of the Company website www.pirelli.com.

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 and voting capital

% share of whole capital

1

MARCO TRONCHETTI PROVERA

26.19

25.53

of which directly

0.00

0.00

and indirectly through CAMFIN S.p.A.

26.17

25.51

and through Cam Partecipazioni S.r.l.

0.02

0.02

2

ASSICURAZIONI GENERALI S.p.A.

5.49

5.36

of which directly

2.18

2.12

and indirectly through

- Ina Assitalia S.p.A.

2.00

1.96

- Generali Vie S.A

1.10

1.07

- Alleanza Assicurazioni S.p.A.

0.02

0.02

- Intesa Vita S.p.A.

0.02

0.02

- La Venezia Assicurazioni S.p.A.

0.00

0.00

- Toro assicurazioni S.p.A.

0.17

0.17

3

EDIZIONE S.r.l.

4.77

4.65

4

MEDIOBANCA S.p.A.

4.61

4.49

5

ALLIANZ SE

4.52

4.40

and indirectly through

Allianz S.p.A.

4.52

4.40

CreditRas Vita S.p.A.

0.00

0.00

Antoniana Veneta Popolare Vita S.p.A.

0.00

0.00

6

PREMAFIN FINANZIARIA S.p.A.

4.48

4.36

of which indirectly through

- FONDIARIA - S.A.I. S.p.A.

4.45

4.34

- Milano Assicurazioni S.p.A.

0.03

0.02

- Popolare Vita S.p.A.

0.00

0.00

7

AXA ROSENBERG GROUP LLC

2.00

1.96

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 CONSOB website. 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 the Issuer Regulation, 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%, 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

In the case of employee shareholders, there are no mechanisms for the exercising of their voting rights 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

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

h) Appointment and replacement of Directors

The Company bylaws[1] 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 the shareholders, signed by those presenting them, must be filed[2] at the registered offices of the Company, for inspection by anyone wishing to do so, at least fifteen days before the date the Shareholders’ Meeting is first convened.

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

Pursuant to the bylaws, 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, or the lesser proportion required by regulatory provisions issued by CONSOB[3], may present slates, subject to their proving ownership of the necessary number of shares not later than the date by which they must be deposited.

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 their personal and professional characteristics, indicating the administration and control appointments held by the candidate with other companies and their suitability to quality as independent, according to the 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 of 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 slates has yet elected a director, or if they have all elected the same number of directors, then within these slates the 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.

If the slate voting mechanism should not assure the minimum number of independent directors, the elected 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.

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.

Loss of the requisites for independence by a director does not cause their appointment to lapse if the minimum number of directors - specified by the legal and/or regulatory provisions - in possession of the legal requisites for independence remain in office.

As per international best practices, when renewing the Board of Directors it is Company practice to allow the shareholders separate votes on: (i) the number of people on the Board of Directors; (ii) the election of Directors through a vote on the slates presented; (iii) the duration of the mandate of the Board of Directors; and (iv) the remuneration 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

A resolution of an Extraordinary Shareholders’ Meeting held on 7 May 2003, gave the Directors 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, resolved 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.

By a resolution of the Extraordinary Shareholders Meeting held on 11 May 2004, the Directors were attributed:

  • 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, or the FSA, where the shares are offered for subscription by the employees of Pirelli & C. or its subsidiaries;
  • 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.

Resolutions to increase the share capital that may ultimately be made by the Board of Directors 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 approval of this Report, the Board of Directors had not made use of the last two powers mentioned above.

The Ordinary Shareholders Meeting held on 29 April 2008 authorised the Board of Directors to purchase the Company’s own shares within the maximum limit specified in art. 2357 of the Civil Code, equal to 10% of the pro-tempore share capital, taking the own shares the Company or its subsidiaries already hold into account. The purchase may be made in one or more operations within 18 months of the date of authorisation. The arrangements for purchasing and disposing of the Company’s own shares are determined by the Shareholders’ Meeting in accordance with the Directors’ Report, available in the 2007 financial reports and on the Company internet site, which may be consulted for further detail.

In its meeting on 9 May 2008 the Board of Directors followed up on the authorisation given by the Shareholders’ Meeting held on 29 April 2008 and approved the programme to purchase and dispose of the Company’s own shares. The main features of the plan were announced to the Company and the market in a press release issued by the Company on 9 May 2008.

On the date of approval of this Report, the Company had purchased 1.250,000 ordinary shares in execution of this programme.

At the date of this report, the Company holds 3,867,500 of its own ordinary shares and 4,491,769 of its own savings shares.

m) Change of control clauses

There are no subjects which may directly or indirectly, also by virtue of shareholder agreements, 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 could 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 the termination/cancellation of appointments without good reason or if the employment relationship ceases after a public takeover bid.

3. COMPLIANCE

Pirelli & C. has adhered to the self-regulatory code of the Italian Stock Exchange (published in July 2002) since its first issue, and in the Board meeting held on 12 March 2007 it formulised its adhesion to the new self-regulatory code for listed companies (published inn March 2006) published on the website of the Italian Stock Exchange www.borsaitaliana.it.

As stated, the Company’s awareness of the importance of an efficient Corporate Governance system to achieve its objectives of creating value induces the Company to keep its corporate governance system constantly in line with national and international best practice.

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, control Pirelli, also by virtue of shareholder agreement, individually or jointly with other persons included in these agreements, exercise control over Pirelli & C.

Nor is the Company subject to direction and coordination activities by any company or body pursuant to article 2497 and subsequent articles 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.

The Boards of Directors of Pirelli & C. and Pirelli RE, in their meetings on 10 March 2009 and 5 March 2009, respectively, reconsidered their previous assessments and considered that - also as a result of the recent changes to the organisation structure and operational character of the latter, which integrated its activities and functions more closely with that of the parent Pirelli & C. - and determined that the parent now performs direction and control activities pursuant to article 2497 and subsequent articles of the Italian Civil Code.

5. Board of Directors

In accordance with the Italian regulations for the traditional direction model, the management of the Company is assigned to the Board of Directors, which plays an active role 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.

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

5.1. Composition

The Board of Directors of the Company, as provided 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 upon their appointment) and may be re-elected.

The Board of Directors in office on 31 December 2008 consists of twenty members and was appointed by the Shareholders’ Meeting held on 29 April 2008 for three financial years to expire at the Shareholders’ Meeting called to approve the financial reports for the year ending 31 December 2010. The average age of the Directors is just over 62 years.

By voting on a slate[4] the minority shareholders were able to nominate four Directors, i.e. one fifth of the total number (specifically, Carlo Angelici, Cristiano Antonelli, Franco Bruni and Umberto Paolucci).

Two lists were presented at the Shareholders’ Meeting on 29 April 2008, one by the participants in the Pirelli & C. Share Block Syndicate and the other by a group of institutional investors[5]. 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 www.pirelli.com, the Company website, where updated versions remain available.

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

Name

Office

Appointed on

Slate

Exec.

Non-exec.

Indep.

Indep. FSA

% BOD

Marco Tronchetti Provera

Chairman

29/04/2008

Maj.

X

100*

Alberto Pirelli

Deputy Chairman

29/04/2008

Maj.

X

100*

Carlo Alessandro Puri Negri

Deputy Chairman

29/04/2008

Maj.

X

100*

Carlo Acutis

Director

29/04/2008

Maj.

X

X

X

100*

Carlo Angelici

Director

29/04/2008

Min.

X

X

X

67*

Cristiano Antonelli

Director

29/04/2008

Min.

X

X

X

100**

Gilberto Benetton

Director

29/04/2008

Maj.

X

33*

Alberto Bombassei

Director

29/04/2008

Maj.

X

X

X

67*

Franco Bruni

Director

29/04/2008

Min.

X

X

X

83*

Luigi Campiglio

Director

29/04/2008

Maj.

X

X

X

100**

Enrico Tommaso Cucchiani

Director

29/04/2008

Maj.

X

33*

Berardino Libonati

Director

29/04/2008

Maj.

X

X

X

83*

Giulia Maria Ligresti

Director

29/04/2008

Maj.

X

50*

Massimo Moratti

Director

29/04/2008

Maj.

X

67*

Renato Pagliaro

Director

29/04/2008

Maj.

X

50**

Umberto Paolucci

Director

29/04/2008

Min.

X

X

X

100**

Giovanni Perissinotto

Director

29/04/2008

Maj.

X

67*

Giampiero Pesenti

Director

29/04/2008

Maj.

X

X

X

67*

Luigi Roth

Director

29/04/2008

Maj.

X

X

X

83*

Carlo Secchi

Director

29/04/2008

Maj.

X

X

X

100*

LEGEND

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

% BOD: indicates the percentage of Board meetings attended by the director

* The percentage also takes meetings attended by the Director in the financial year prior to the renewal of the Board of Directors by the Shareholders’ Meeting of 29 April 2008.

** The Director was appointed for the first time by the Shareholders’ Meeting of 29 April 2008. The percentage thus only takes account of the meetings held after that date.

In accordance with the provisions of the Self Regulatory Code[6], the positions occupied by the Directors in major companies other than Pirelli Group companies are listed at the end of the Report.

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

Name

Office

R.C.

CCI

% Committee

Carlo Angelici

Member

X

100*

Alberto Bombassei

Member

X

100**

Franco Bruni

Member

X

100*

Berardino Libonati

Chairman

X

100*

Giampiero Pesenti

Member

X

100*

Carlo Secchi

Chairman

X

100*

LEGEND

R.C.: indicates the Remuneration Committee

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

%. Committee: indicates the percentage of meetings of the Committee in question attended by the director

* The percentage also takes meetings attended by the Director in the financial year prior to the renewal of the Committees consequent on the renewal of the Board of Directors by the Shareholders’ Meeting of 29 April 2008.

** The Director was appointed to this Committee for the first time after the renewal of the Board of Directors by the Shareholders’ Meeting of 29 April 2008. The percentage thus only takes account of the meetings held after that date.

No Director ceased to serve after the election of the Board of Directors by the Shareholders’ Meeting of 29 April 2008.

In addition to those directors appointed to the Board on 29 April 2008, Gabriele Galateri di Genola, Mario Garraffo, Dino Piero Giarda and Aldo Roveri also served as directors, and ceased to serve due to the expiry of their mandates with the Shareholders’ Meeting of 29 April 2008 that approved the financial statements for the year ended on 31 December 2007.

Maximum accumulation of directorships in other companies

On 29 April 2008, in accordance with the provisions of the Self Regulatory Code[7] the Board of Directors confirmed the validity and applicability of the Policy adopted by the Board during the previous mandate[8], which established that serving as a director or auditor 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 (i) 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.

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

After investigation by the Committee for Internal Control and Corporate Governance, the Board of Directors, in its meeting of 10 March 2009, 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 or Pirelli & C. according to the policy on this issue adopted by the Company.

When the Board of Directors is due for renewal, 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 aforementioned Policy is attached 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[9] that schedules 4 meetings for 2009, specifically:

  • 10 March 2009: Board of Directors’ meeting to examine the budget and consolidated financial reports for the year ended on 31 December 2008
  • 07 May 2009: Board of Directors’ meeting to examine the consolidated results for the first quarter of 2009 (intermediate report on operations at 31 March 2009).
  • 30 July 2009: Board of Directors’ meeting to examine the half-yearly financial report at 30 June 2009.
  • 5 November 2009: Board of Directors’ meeting to examine the consolidated results for the last quarter of 2009 (intermediate report on operations at 30 September 2009).

Board meetings may take place by means of telecommunication, enabling all parties to participate in the debate, with equal information.

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 Statutory Auditor.

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

During the 2008 financial year there were 6 meetings of the Board of Directors, 4 of which after the Board had been renewed. After the renewal, each meeting lasted an average of about two hours. The percentage attendance of Directors during the financial year was over 75% on the whole, and the independent Directors assured an average attendance of about 95%.

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 and all Shareholders’ Meetings that were held during the 2008 financial year.

At the date of approval of the Report, there have 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[10], 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[11]:

  • 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 clashes of interests;
  • grants powers to the Managing Directors and the Executive Committee (if established) and revokes them; defining their limits, the manner in which they are to be exercised and the frequency, at least quarterly, at which such bodies must report their activities in the exercise of the powers granted to them to the Board;
  • determines, after having examined the proposals of the Remuneration Committee 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 into consideration, specifically, 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;
  • at least once a year, evaluates the size, composition and functioning of the Board itself and its Committees, expressing opinions on any professional figures whose presence in the Board it might deem advisable;
  • constitutes the Supervisory Body pursuant to legislative decree no. 231 of 8 June 2001;
  • appoints the General Managers and the executive responsible for drawing up the company accounting documents, determining their responsibilities and powers;
  • appoints and dismisses the internal control officer and determines their duties and remuneration, after having received the opinions 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 the responsibilities attributed to it by the law and the Company bylaws.

Evaluation of the general results of operations[12]

Pursuant to the bylaws[13] and the current regulations[14], the Board of Directors has evaluated the general results and likely development of operations at least once a quarter.

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

Internal control system and governance system[15]

The Board of Directors has assessed[16], 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 10 March 2009, 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[17].

Remuneration of the directors vested with special responsibilities[18]

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[19].

After its renewal, the Board also deliberated the proposal of the Remuneration Committee, approved by the Board of Statutory Auditors, for the fixed and variable remuneration package for directors vested with special responsibilities.

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[20]

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

Moreover, the Board, without prejudice to the responsibilities and powers reserved to it by the law, bylaws, powers structure and internal procedures, has also determined that it is the responsibility of the Board of Directors to approve in advance 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.

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[21]

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 new Self-Regulatory Code[22].

As proposed by the Committee for Internal Control and Corporate Governance, and based on suggestions made by the independent directors[23], and taking the positive experience of preceding years into account, the Board concluded that it would be advisable to start a similar self-evaluation of the Board of Directors for the 2008 financial year.

Specifically, considering the good results of the previous financial year, an opportunity arose to examine other topics in depth, and also to propose that the Board focus on other topics that emerged from the self-evaluation undertaken in the previous year to check on the improvements made. In accordance with common practice, 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 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 methods for the self-evaluation and to analyse its results.

Directors not only expressed their views of some topics that emerged during the previous year’s assessment, checking on any improvements noted, but were also asked to express their opinions, primarily on the following aspects:

  • a Board performance evaluation: consisting of an evaluation by Directors principally concerning the operation of the Board and its Committees;
  • a directors’ evaluation: focussed on examining in depth the Directors’ opinions of the degree of effective participation in and knowledge of the Company by other Directors;
  • a self evaluation: involving self assessment by individual Directors of their own participation in and knowledge of the Company.

The following specific aspects were examined in particular depth:

  • the functioning of the Committees and the information they feed back to the full Board;
  • the analysis and management of the risks the Company has to oversee, and Directors’ knowledge and assessment of the internal control system;
  • the adequacy of the general organisational, administrative and accounting structure;
  • the governance of the Group from a market perspective.

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 10 March 2009.

The Directors expressed a high degree of participation in the board performance evaluation and the examination of the results showed the emergence of a positive impression of the Board and its Committees, although a need for some changes also emerged.

Specifically, the Directors expressed their appreciation of the working meetings they had had with Senior Management to examine in depth the different business sectors in which the Group operates[24] and suggested that this practice should be consolidated, since it improves their knowledge of the Company and its businesses.

Moreover, taking the specific economic scenario into account, the Directors suggested that the topic of risk management should be further examined, to better understand how the Company and the Group identify, evaluate and control the most significant risks.

This third edition of the board performance evaluation again 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 bound by the prohibition contained in article 2390 of the Civil Code.

5.3. Delegated Bodies

Chairman

The Board of Directors appoints its Chairman, where the Shareholders’ Meeting has not done so. After its renewal, the Board of Directors appointed Marco Tronchetti Provera as Chairman in its meeting of 29 April 2008.

The Chairman is 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’s signature must accompany the Chairman's signature).

Furthermore, the Chairman, Marco Tronchetti Provera, was confirmed as responsible for the following organizational functions:

  • relations with shareholders and the information provided to them;
  • formulation of the general strategies and development policy for the Company and the Group, and any extraordinary corporate actions, to be submitted to the Board of Directors;
  • proposals for the appointment of members of the General Managers’ departments and, after consulting the Remuneration Committee, for their remuneration, to be submitted to the Board of Directors;
  • chairmanship of the Managing committees with strategic functions;
  • coordination of the activities of Managing Directors, where appointed;
  • all forms of communication with the market, with the power to delegate to Managing Directors, where appointed.

General Managers and other Managers

Powers pertaining to his specific assigned functions, are subject to certain quantitative limits, have been granted to Claudio De Conto, Chief Operating Officer.

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 2008 the Chairman, the Chief Operating Officer 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 significant transactions to the Board of Directors.

In fact, delegation is not a way of assigning exclusive powers but is rather the solution adopted by the Company to ensure the best degree of operational flexibility in terms of the organization of the Board (and in terms of relationships with 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 about the performance of the Company, its general management, its prospects, and the transactions with greatest impact on its profitability, financial position or assets and liabilities carried out by the Company or its subsidiaries; in particular, the delegated bodies report any transactions in which they have an interest, on 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.

To foster the orderly organisation of the flow of information, the Company developed a specific Procedure, in use since 2002, which clearly defines the rules to follow to comply with the information reporting obligations.

After its renewal, in its meeting on 29 April 2008 the Board of Directors confirmed the validity and applicability of the procedure on information flows adopted by the Board during its previous mandate.

The purpose of the new procedure is to regulate and coordinate the various types of data flowing to Directors and Auditors, so that they all have the common aim of making the data needed to properly fulfil its directional, policy and control responsibilities continuously available to the Board.

The text of the procedure, reprinted at the end of this Report, is also available in the Governance section of the Company website www.pirelli.com.

5.4. Other Executive Directors

The Board of Directors considers the Chairman of the Board of Directors, Marco Tronchetti Provera, and the two Vice Chairmen, 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 companies that are subsidiaries of Pirelli Tyre) to be executive directors.

In accordance with the recommendations of the Self Regulatory Code[25], to increase all directors’ knowledge of the reality and dynamics of the company, several working lunches with Senior Management were organised during the year, to examine in greater detail the various business sector in which the Group operates.

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 light of a substantial evaluation of the information provided by the Directors and that available to the Company, the Board of Directors confirmed that the eleven directors who, on appointment, were qualified as independent (Carlo Acutis, Carlo Angelici, Cristiano Antonelli, Alberto Bombassei, Franco Bruni, Luigi Campiglio, Berardino Libonati, Umberto Paolucci, Giampiero Pesenti, Luigi Roth and Carlo Secchi), continue to maintain these requisites in the Board meeting on 10 March 2009. A further six Board members (Gilberto Benetton, Enrico Tommaso Cucchiani, Giulia Maria Ligresti, Massimo Moratti, Renato Pagliaro and 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%, which is about 65% of all the non-executive directors.. The everage of the independent Directors is about 67 years. It should also be noted that the Board of Directors has accepted that all directors who can be qualified as independent are also independent in terms of the requisites specified in the FSA for the members of the Board of Statutory Auditors.

In line with the recommendations of the Self-Regulatory Code[26], 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 assessment based on the most rigorous requirements of the Self-Regulatory Code[27], which states that a director may not - by law - be considered independent:

a) if they, directly or indirectly including on behalf of subsidiaries, trust companies or through third parties, control the issuer or are able to exercise considerable influence, 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[28] 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;

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

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

— a subject who, alone or together with others in a shareholder agreement, controls the issuer, or

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

d) if 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, including share options;

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

f) if they are an executive director in another company in which an executive director[29] of the issuer is a director;

g) if they are a partner or director of a company or body belonging to the company mandated to audit the accounts[30] of the issuer;

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

Meetings of the independent directors

In accordance with the recommendations of the Self-Regulatory Code[31], the independent directors met four times during the financial year in the absence of the other directors, two after the renewal of the Board of Directors by the Shareholders’ Meeting held on 29 April 2008. The meetings held during the new mandate focussed on topics inherent to the corporate governance system of the Company, with particular attention paid to the system used for the self evaluation of the Board of Directors and the results achieved after the experiences of previous years, as well as to the remuneration mechanisms for the Senior Management of the company.

During 2009, two meetings of the independent directors only have already been held.

5.6. Lead independent director

In November 2005, to further extend 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 issues raised and contributions made by the independent Directors.

The Lead Independent Director also has the right to convene - on his own initiative or upon the request of other Directors - specific meetings of independent Directors only in order to discuss any topics felt at the time to be of interest to the functioning of the Board of Directors or to the running of the business. Last but not least, please note that the Lead Independent Director works with the Chairman of the Board of Directors to improve the operation of the Board itself, and in order to cooperate to ensure that directors receive complete and prompt information.

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 and all Shareholders’ Meetings that were held during the 2008 financial year.

6. HANDLING OF COMPANY INFORMATION

6.1 Internal management and disclosure of documents and information

Market transparency, and clear, correct and complete information, are the values that are upheld by the conduct of the corporate bodies, the management and all those who work for the Pirelli Group.

In March 2006 the Board of Directors adopted a specific Procedure for the management and communication to the market of privileged information that, taking account of the regulations on market abuse, governs the management of privileged information on Pirelli & C., its unlisted subsidiaries and the listed financial instruments of the Group. The procedure applies to all members of corporate bodies, employees and collaborators of companies external to the Group that might have access to information that could evolve into privileged 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.

In accordance with the legal provisions, the Procedure specifically defines:

  • the requisites and responsibilities for classifying privileged information;
  • the arrangements for tracing access to privileged information in transit;
  • the tools and rules to protect the confidentiality of privileged information in transit;
  • the operational arrangements for the communication of privileged information to the market and, in general, on communications with the public and/or analysts and investors.

The Procedure also disciplines the institution of a register of persons with access to confidential information, in operation since 1 April 2006.

In its meeting on 29 April 2008, the Board of Directors confirmed the validity and applicability of the “Procedure for the management and communication to the public of privileged information” and, in line with its practice of periodically revising its procedures in relation to regulatory changes and best practice, the Board, changed and sharpened the text, as proposed by the Committee.

The updated text of the procedure is printed at the end of this Report and is also available in the Governance section of the Company website www.pirelli.com.

6.2 Insider dealing

Matters regarding the transparency of transactions involving Company shares or financial instruments linked to them, made directly or by third parties by relevant persons or by persons closely related or linked to them (i.e. insider dealing) are currently fully governed by law and by the Consob implementing regulation (art. 114 of the Financial Services Act and articles 152-sexies and subsequent articles of the Issuer Regulations).

Pursuant to the law, Directors and statutory auditors of the Company, as well as “persons who carry out administrative [...] functions in a listed company and managers that have regular access to privileged information [...] and have the power to make management decisions that could affect the performance and the future prospects of a listed company…” and others, 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 Chief Operating Officer, and - as an example of self-regulation - the Managing Director and General Manager of subsidiary Pirelli Tyre. Similar disclosure obligations have also been adopted 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 the law, the Board of Directors decided to confirm, in accordance with the previous mandate, black out periods for the persons mentioned above who must adhere to insider dealing regulations, who must therefore abstain from making transactions on Company shares or on financial instruments linked to these shares in these periods. These periods may, moreover, be extended or suspended by the Board of Directors in exceptional cases.

The text of this procedure is printed at the end of this Report, and available in the Governance section of the Company website, www.pirelli.com.

7. BOARD COMMITTEES

In the meeting of the Board of Directors on 29 April 2008, after its renewal, the Board instituted two subcommittees: the Committee for Internal Control and Corporate Governance, and the Remuneration Committee.

8. APPOINTMENTS COMMITTEE

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

Since the Board considers the above arguments still valid, it did not feel 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 among its members, charged with fact-finding and advisory functions, in the year 2000.

In full compliance with the provisions of the Self-Regulatory Code[32], the Remuneration Committee appointed by the Board of Directors in its meeting on 29 April 2008,. is composed exclusively of independent Directors:

  • Berardino Libonati (Chairman)
  • Alberto Bombassei
  • Giampiero Pesenti

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[33].

Functions of the Remuneration Committee:

In line with the provisions of the Self-Regulatory Code, the Board of Directors confirmed the fact-finding and consultative role of the Remuneration Committee.

Specifically, the Remuneration Committee:

  • formulates proposals to the Board for the remuneration of the Managing Directors and those persons who hold certain offices to ensure that their remuneration is aligned with the objective of shareholder value creation in the medium-long term;
  • periodically evaluates the remuneration criteria for the senior management of the Company and, as requested by the Managing Directors, formulates proposals and recommendations, with specific reference to the adoption of possible stock option plans or stock bonuses;
  • monitors the application of the decisions made by the competent bodies and of the company policies regarding top management pay. 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 and, if deemed appropriate, other Company and/or Group representatives and the External Auditors, attend the meetings of the Committee.

In line with the recommendations of the Self Regulatory Code[34], directors vested with special offices do not attend Remuneration Committee meetings.

The information and documents available and required for informed deliberation of the material submitted to the committee have always been circulated to all members reasonably in advance.

The Committee also has the right[35] to access company departments and information as necessary for the execution of its assigned duties, making use of the support of the Secretary of the Board of Directors.

The Committee has adequate financial resources for the performance of its duties with independent expenses.

During 2008, the Remuneration Committee met four times (two after its renewal), with all members in attendance, and examined issues including the pay packages of the Chairman and the General Managers , formulating proposals for the Board and disclosing the criteria applied in reaching its decisions. The Committee was also informed of the decisions taken by Pirelli Tyre on the subject of the pay of the Managing Director and General Manager Dr. Francesco Gori.

The Committee made us of leading executive pay consultants to develop its analyses based on job-comparable benchmarking and an analysis per grade, independently of the specific role held. The analysis was developed taking data published by Italian and International Groups considered comparable in terms of organisational structure and/or industrial sector and/or capitalisation into account.

10. REMUNERATION OF DIRECTORS

In addition to reimbursement for expenses incurred in performing their duties, Directors receive annual fees determined by the Shareholders’ Meeting[36].

The meeting of 29 April 2008 decided “to establish a maximum of 1,200,000 euros as the total annual remuneration 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 29 April 2008, the Board of Directors established the distribution of the remuneration as follows:

  • 50,000 euros per annum for each of the 20 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 flexibility, including for the adoption of any new governance solutions.

A fee of 15,000 euros per annum is also payable to the Board member called on to be a member of the Self-Regulatory Body pursuant to legislative decree no. 231/2001 (Carlo Secchi).

The remuneration of directors given particular tasks is established by the Board of Directors upon consultation with the Board of Statutory Auditors as proposed by the Remuneration Committee. The current remuneration system provides[37] for payments to comprise a fixed amount and an additional bonus linked to the performance of the Group, and to be related to the attainment of specific objectives set by the Board. Specifically, Company practice, based on analyses carried out with major executive pay consultants, is to attribute an incentive based on a mechanism that includes a financial type (Net Financial Position) as an access condition (an “on/off” condition), linked to a quantitative parameter of annual profitability (PBIT).

A short report on the remuneration of the directors vested with special powers and managers with strategic responsibilities can be found in the table in the notes to the financial statements for 2008. It should be noted that the Board of Directors of the Company has identified the managers with strategic responsibilities as those who “hold the power to take decisions which may impact on the future development and evolution” of the Company” and as such its Chief Operating Officer (Dr. Claudio De Conto), and the Managing Director and General Manager of Subsidiary Pirelli Tyre (Dr. Francesco Gori).

It should also be noted that the pay proposals (fixed and variable components) for the Chief Operating Officer of the Company were developed after an in-depth comparative analysis by a major consultancy on market positioning in terms of the remuneration packages of a comparable sample of Italian and international companies.

Lastly, it should be noted that there are no stock-option plans for either the executive or the non-executive directors[38].

11. The Committee for Internal Control and Corporate Governance

The Board established[39] the Committee for Internal Control and Corporate Governance, charged with fact-finding and advisory functions, from amongst its members in the year 2000.

In line with best practices and in full compliance with the recommendations in the Self-Regulatory Code, the Committee appointed by the Board of Directors in its meeting on 29 April 2008 is exclusively composed of the following independent Directors:

  • Carlo Secchi (Chairman);
  • Carlo Angelici;
  • Franco Bruni

two of whom[40] possess adequate accounting and financial experience.

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

The meetings of the Committee for Internal Control and Corporate Governance are regularly minuted by the secretary, and the minutes are transcribed into a specific register[41].

Functions attributed to the Committee for Internal Control

The Board of Directors that convened on 29 April 2008 confirmed the attributes - of a fact-finding and advisory nature - of the Committee for Internal Control and Corporate Governance in line with those specified in the Self-Regulatory Code, and also specified that the Committee should continue to maintain the corporate governance prerogatives that have characterised it since its establishment.

Specifically, the Committee for Internal Control and Corporate Governance:

  • assists The Board of Directors:

• in the definition of policies for the internal control system, so that the principal risks for the Company and its subsidiaries are correctly identified and adequately measures, managed and monitored, and also in the determination of criteria for the compatibility of these risks with healthy and correct management of the business;

• in the identification of an executive director (normally a Managing Director) charged with supervising the operations of the internal control system;

• in the evaluation, at least annually, of the adequacy, efficacy and effective operation of the internal control system;

• in the description of the essential elements of the internal control system in the corporate governance report, expressing its evaluation of the system’s overall adequacy;

  • expresses an opinion on proposals to appoint, revoke or assign tasks relating to the internal control officer;
  • evaluates the correct use of accounting principles and their homogeneous application inside the Group and for the purpose of drawing up the consolidated financial reports;
  • at the request of the executive manager with specific responsibility (for risk management), expresses opinions on specific aspects of the identification of the main company risks and on the design, implementation and management of the internal control system;
  • reviews the work plan prepared by the internal control officers, from whom it receives periodic reports;
  • evaluates the proposals formulated by independent auditors in order to obtain the commission, as well as the audit plan and the results set out in the auditors’ report and in the letter of suggestions, if produced;
  • monitors the efficacy of the audit process;
  • monitors the respect of the principles that the Company has formulated for execution of transactions with related parties;
  • reports to the Board of Directors, normally in the first available meeting, on the activity carried out and in general on the adequacy on the internal control system when the annual and half-yearly financial reports are being approved;
  • monitors the compliance with the rules of corporate governance and their periodic updating, and respect for any rules of conduct adopted by the Company and its subsidiaries. It is also responsible for proposing the methods for and times at which the Board of Directors should perform its annual self-evaluation;
  • if an independent Director should be replaced, it proposes candidates for co-opting to the Board of Directors;
  • it performs the further tasks assigned to it by the Board of Directors, also in relation to the monitoring of procedural correctness and of the substantial fairness of operations.

In line with the “Procedure for information flows to Directors and Auditors”. The Committee has the right to consider, on a case by case basis, the following correlated parties:

(i) companies in which the natural persons indicated in the procedure mentioned above hold strategic management roles, and the companies controlled by these companies;

(ii) companies which share a majority of directors with Pirelli.

The Committee - which may also request the assistance of external consultants in fulfilling its mandate - meets whenever its Chairman deems it appropriate or a meeting has been requested by another member of the committee or by a Managing Director.

The Board of Statutory Auditors[42] and, if deemed appropriate, other Company and/or Group representatives attend the meetings of the Committee.

The internal control officer (who is functionally answerable to the Committee for Internal Control and Corporate Governance) reports on his work and on the arrangements by which risk management and compliance with plans of defined content occur).

The internal control officer also reports, at least once a year, to the Board of Directors, either directly or through the Committee for Internal Control and Corporate Governance and the Board of Statutory Auditors.

The information and documents available and required for informed deliberation of the material submitted to the committee have always been circulated to all members reasonably in advance.

The Committee has adequate financial resources for the performance of its duties with independent expenses. In accordance with the provisions of the Self-Regulatory Code[43], the Committee also has the right to access company information and departments as necessary for the execution of the tasks assigned to it, making use of the support of the Secretary of the Board of Directors.

During 2008, the Committee for Internal Control and Corporate Governance met 4 times (with three of these meetings held after its renewal) and all members participated in these meetings. The average duration of the meetings was over two and a half hours.

The Committee proactively contributed to the process of implementing and updating the corporate governance tools of the Company, and, in particular, during the financial year it submitted the following interventions to the Board of Directors for approval[44]:

  • identification of the black-out periods applicable to subjects required to respect the insider dealing regulations;
  • the adoption of a new “procedure for information flows to directors and auditors”.

The Committee has also proposed some changes to the company bylaws, to change the period of time specified in article 154-ter of the FSA as notice for Shareholders’ Meetings to be called, and to provide greater clarity, with more systematic and complete rules as well as changes to incorporate policies gradually developed in response to legislative initiatives. It also plans to include a mechanism to guarantee the presence of the minimum number of independent directors specified in the current law in the company bylaws.

The Company was informed about the adoption of the procedure[45] concerning article 36 of the Markets Regulation, which regulates the markets and conditions at which the shares of companies incorporated in non-European Union countries may be listed.

Also during 2008, the internal control officer of the Company (who is the head of the Internal Auditing Department) was able to report his actions to the Committee. The Committee also monitored the work done by the Internal Audit Department, specifically examining the result of work carried out as part of the Audit Plan approved by the Committee itself.

The internal control officer also reported on his activity to the Committee: for information, please see the section entitled “Officer responsible for the preparation of the company accounting documents”.

Lastly, it is considered appropriate to provide an account of the development of the actions, legal and otherwise, that involved two ex-heads of Company Security that were reported in the corporate governance report for 2006 and 2007, and have been the subject of an investigation by the Committee for Internal Control and Corporate Governance and the Board of Statutory Auditors.

In particular, the Committee has been informed that, on 18 July 2008, the Company was informed that the investigations had been completed, and informed that an entry had been made in the register of investigations pursuant to legislative decree 231/2001 and that it was considered the victim of the offence of misappropriation with multiple aggravating circumstances. Subsequently, on 19 January 2009, the Company was notified that a preliminary hearing date had been set, and an indictment issued for violation of Legislative Decree 231/2001. The preliminary hearing was set for 30 March 2009.

At the date of approval of this Report the decisions to be taken in relation to the proceedings to improve the protection of the Company’s interests, were still being assessed, with the assistance of the Company’s lawyers.

With the assistance of highly qualified experts in the field, the Company has also separately examined the potential civil liabilities consequent on “intrusive activities” undertaken by ex-employees of the Company. After assessing the investigation made by the Committee, the Board of Directors, while considering and repeating the total non-involvement of the Company in the acts committed, which also damaged the Company itself - in coherence with the values of fairness and correctness that inform its action, and the importance of its human resources that Pirelli has always acknowledged, decided to offer an immediate financial contribution, the amount of which to be determined based on a fair evaluation, also supported by the experts mentioned above, to all the past or present employees of the Pirelli Group that were the object of “intrusive activities”, as an act of solidarity.

It should be noted that the Company is proceeding with the civil actions started against the security service suppliers involved in the investigations in order to be compensated for services that were not contractually fulfilled or were even illegal.

The Committee for Internal Control and Corporate Governance and the Board of Directors, taking into account the comments of the Board of Statutory Auditors, judged the internal control system of the Company and of its underlying Group to be adequate[46].

12. INTERNAL CONTROL SYSTEM

The internal control system of Pirelli & C. and the Group it heads is designed to ensure the provision of correct information and adequate cover of all the activities of the Group, with special reference to those areas that are considered to be potentially at risk.

It has developed as a process intended to achieve substantial and procedural fairness, transparency and accountability by ensuring: that transactions and, more generally, business related activities are efficient and can be known and verified, that financial information and accounting and operational data are accurate, that applicable laws and regulations are complied with, and that the assets of the business are safeguarded, not least with a view to prevent the perpetration of fraud against the Company and the financial markets.

The cardinal rules of the internal control system of the Company are:

  • the separation of roles in the performance of the principal activities involved in each operating process;
  • the traceability and constant visibility of decisions;
  • the management of decision-making processes according to objective criteria.

12.1. Executive director responsible for the internal control system

Responsibility for the internal control system lies with the Board of Directors, which lays down the guidelines for the system and periodically verifies that it is adequate and working effectively. To this end, the Board refers to the Committee for Internal Control and Corporate Governance, as well as to an Internal Control Officer, who is given an adequate level of independence and appropriate means in order to carry out this mandate, and who carries out typical audit functions to verify the adequacy and efficiency of this system; and, if anomalies are detected, who proposes the necessary corrective solutions.

After its renewal, the Board of Directors, in its meeting of 29 April 2008, identified the Chairman of the Board of Directors as the director charged with the internal control system to whom the following tasks have been assigned, in line with the recommendations of the Self-Regulatory Code[47]:

  • ensuring that the main company risks are identified, taking the characteristics of the activities performed by the issuer and its subsidiaries into account, and periodically submit them to the Board of Directors for examination;
  • executing the policy lines defined by the Board of Directors, ensuring that the internal control system is planned, implemented and managed, and constantly ascertaining its overall adequacy, efficacy and efficiency;
  • adapting the system to changes in business conditions and in the legal and regulatory frameworks;
  • propose the appointment, revocation and remuneration of one or more internal control officers to the board.

12.2. Internal control officer

The internal control officer - the Board of Directors, after its renewal, with the approval of the Committee for Internal Control and Corporate Governance and in accordance with best practice, as proposed by the Executive Director charged with the internal control system, confirmed as the head of the Internal Audit Department (Dr. Maurizio Bonzi) reports his activities to the Committee for Internal Control and Corporate Governance and the Board of Statutory Auditors and is hierarchically answerable to the Chairman of the Board of Directors of Pirelli & C.

The Internal Audit Department assumes a role of great prominence in the internal control system and also, due to the activities it performs regarding subsidiaries, t has the principal task of assessing the adequacy and functionality of the control, risk management and corporate-governance processes throughout the entire Group by means of independent assurance and consultancy. The work of the Internal Audit Department is carried out in accordance with its mandate, and approved by the Committee for Internal Control and Corporate Governance, regarding the following aspects:

  • mission;
  • objectives and responsibilities (independence, complete access to information, activity framework, communication of results);
  • improvement in the quality of internal audits; principles of professional ethics;
  • professional reference standards.

The Company also has in place a planning and control system that focuses on individual sectors and work units, which produces a detailed monthly report for the General Managers, providing a useful tool for the supervision of specific activities. To persue the strategies and guidelines adopted by the parent company, the Chief Operating Officer and appropriate senior executives for the sector sit on the Boards of Directors of the largest subsidiaries.

Finally, on the subject of the internal control system, it should be noted that the Company continues to apply the methodology (called “Project 262” within the company) to verify the adequacy of the administrative and accounting procedures to provide the delegated administrative bodies and the executive responsible for drawing up the company accounting documents with a system of controls for the preparation and validation of periodic accounting reports which allow these individuals to make the declarations regarding them required by the law.

12.3. Organisational model ex Legislative Decree 231/2001

The internal control system described above has been further strengthened by the introduction of an organizational model that the Board of Directors approved on 31 July 2003 and which has been revised and modified according to updated regulations (most recently with a resolution of the Board of Directors on 9 March 2008). This organisational model, which is intended to ensure the development of a system that meets the specific requirements deriving from the entry into force of Legislative Decree 231/2001, on the administrative liability of companies for criminal offences committed by their employees, the model consists of a set of principles and procedures arranged in a pyramid that, starting from the base, can be summarized as follows:

  • a Group Code of Ethics, which enunciates the general principles (transparency, correctness and fairness) that inspire the conduct of business. It indicates the objectives and the values informing business activity in relation to the main stakeholders with which Pirelli & C. interacts on a daily basis: the shareholders, the financial market, customers, staff and the community;
  • general principles of internal control, which qualify the Internal Control System, the field of application of which extends uniformly across the various levels of the organisation;
  • lines of conduct which set out specific rules aiming to avoid the creation of environmental situations that favour criminal activity in general and, in particular, crimes pursuant to legislative decree 231/2001, and translate the principles expressed in the Code of Ethics into operational practice;
  • internal control checklists, which set out the main phases of each high and medium risk process and, for instrumental processes, the specific checks to be made to reasonably prevent the risk of any criminal offence and the flows of information to the Supervisory Body to draw attention to situations of possible non-compliance with the procedures established in the organisational model.

The Organisational Model mentioned is available on the Company website www.pirelli.com.

A specific Self-Regulatory Body, with full economic independence, monitors the functioning of and the adherence to the organisational model. It is composed of Carlo Secchi, the Lead Independent Director and Chairman of the Committee for Internal Control and Corporate Governance, Statutory Auditor Paolo Domenico Sfameni, a member of the Board of Statutory Auditors, and Maurizio Bonzi, head of the Internal Audit Department and internal control officer.

This assures the full autonomy and independence of this Body, and the input of the different professional skills that contribute to the corporate management control.

The Supervisory Body is also charged with making ad hoc recommendations to the Board of Directors to adapt the organizational model to changes in the legal framework, and to changes in the nature of the business activities of the Company and the ways in which they are conducted. While the Supervisory Body reports to the Board of Directors, the Committee for Internal Control and Corporate Governance and the Board of Statutory Auditors on the checks it has performed and their outcomes.

Each member of the Self-Regulatory Body is paid a gross annual fee of 15,000 euros.

The mandate of the Self-Regulatory appointed by the Board of Directors on 29 April 2008 expires with that of the Board that appointed it.

With reference to the other Italian companies in the Group, the Self-Regulatory Body has been identified by seeking the technical and operational solution that, while respecting the mandate and the powers reserved to this body by law, is appropriate to the size and organizational context of each company.

Lastly, a disciplinary system has been introduced to sanction non-compliance with the measures indicated in the organisational, operational and control systems.

Finally, it should be pointed out that the Internal Audit Department of Pirelli & C. provides, when requested by the self-regulatory bodies of Group companies, operative assistance in the management and analysis of information flows established pursuant to Art. 6, subsection 2, letter d), of Legislative Decree 231/2001, as well as in implementation of specific audits on the basis of data received through the aforementioned information flows.

During the year, the Self-Regulatory Body became involved in the court case that implicated two ex-heads of the Security Department of the Company, as detailed in the section entitled “Committee for Internal Control and Corporate Governance”. In this respect, the Self-Regulatory Body has taken note of the circumstances reported in the aforementioned section.

12.4. External auditors

The audit of the company accounts is carried out by an auditing firm appointed by the Shareholders’ Meeting and chosen from the firms listed in the appropriate register kept by Consob.

The Shareholders’ Meeting held on 29 April 2008 appointed Reconta Ernst&Young S.p.A. as external auditors of the statutory and consolidated financial statements and abbreviated half-yearly financial reports for the years 2008-2016. Pursuant to current law, the appointment was made at the reasoned proposal of the Board of Statutory Auditors after extensive in-depth technical-economic evaluation. This evaluation was performed taking into account a comparative overall analysis of the proposals received, with detailed comparison of (i) the costs and conditions of the mandate; (ii) the mix of personnel employed; (iii) the coverage of the territory and the skills and specific experience, and (iv) the fees proposed for work within the same perimeter. The Board of Statutory Auditors kept the Committee for Internal Control and Corporate Governance constantly informed on the progress of the selection process.

Reconta Ernst&Young S.p.A. is the Italian organisation of the Ernst&Young network, which through the organisations present in the various countries in which the Group operates, has also been appointed to audit the accounts of the principal Pirelli Group companies.

The fees paid to Reconta Ernst&Young (and to the other companies that are part of its network) are reported in detail in the notes to the consolidated financial statements of Pirelli & C. at 31 December 2008.

12.5. Officer responsible for preparing the company accounting documents

The Company bylaws[48] attribute the power to appoint the Responsible Officer to the Board of Directors, after having received the opinion of the Board of Statutory Auditors; they also establish that this appointment expires when the term of the Board of Directors making the appointment expires. The Responsible Officer must be an expert on administration and control matters, and possess the proper requisites, as established for directors.

After its renewal, the Board of Directors, with the favourable opinion of the Board of Statutory Auditors, confirmed Claudio De Conto, Chief Operating Officer of the Company, to whom all the administrative and tax structures of the Group report, as the Responsible Officer.

The Board of Directors, in compliance with the provisions of the FSA, has assigned the following duties to the Responsible Officer:

a) to organise adequate administrative and accounting procedures for the formation of the company financial reports and consolidated financial statements and all other communications of a financial nature;

b) to issue a written declaration attesting that the documents and communications of the Company disseminated to the market and the related financial reports, including mid-year reports, of the Company correspond to the documentary evidence, ledgers and accounting records;

c) to attest, with a specific report drawn up according to the model established in the CONSOB regulations, attached to the financial reports, half-yearly report and consolidated financial statements:

• the adequacy and effective application of the procedures specified in paragraph a) above during the period to which the documents refer;

• that the documents are drawn up in compliance with the applicable international accounting standards recognised in the European Community pursuant to EC regulation no. 1606/2002 of the European Parliament and Council of 19 July 2002;

• that the documents correspond with the ledger entries and accounts;

• that the documents are suitable to provide a true and correct representation of the economic, financial and equity situation of the Company and the set of business included in the consolidation;

• for the statutory and consolidated financial reports, that the report on operations includes a reliable analysis of their progress and results, of the situation of the Company and the set of businesses included in the consolidation, together with descriptions of the principal risks and uncertainties to which they are exposed;

• for the abbreviated half-yearly report, that the half-yearly report on operations contains a reliable analysis of the information specified in subsection 4 of article 154 of the FSA.

The Board of Directors ensures that the Responsible Officer has adequate means and powers to perform the duties assigned to him, and monitors that the administrative and accounting procedures are effectively respected.

For this purpose the Responsible Officer reports, at least once a year, to the Board of Directors, either directly or through the Committee for Internal Control and Corporate Governance and to the Board of Statutory Auditors for those matters within its remit.

He promptly reports to the delegated administrative body, to the Board of Directors, also through the Committee for Internal Control and Corporate Governance, on any matters of significant relevance that he believes must be declared in the report specified in article 154-bis of the FSA unless corrected.

The Responsible Officer is invited to attend the meetings of the Board of Directors of the Company at which examination of the economic and financial data of the Company is on the agenda.

The Responsible Officer has direct access to all the information necessary for the production of the accounting data, without the need of any authorisation, shares the internal flows for accounting purposes, and approves all the company procedures that have an impact on the economic, financial and equity situation of the Company.

The Responsible Officer is granted all powers of an organisational and management nature needed to perform the tasks attributed to him by the current regulations, the Company bylaws and the Board of Directors.

To exercise the powers conferred to him he is granted full economic autonomy.

The Responsible Officer has attended all the meetings of the Board of Directors of the Company for which the examination of the economic-financial data of the Company was on the agenda, and has issued, after his appointment, the attestations and declarations specified in article 154-bis of the FSA.

The Responsible Officer reported to the Committee for Internal Control and Corporate Governance and, when the budget was being approved, to the Board of Directors, concerning the adequacy and suitability of the powers and means conferred by the Board of Directors of the Company, confirming that he had direct access to all the information necessary for the production of the accounting data, without need of any authorisation, shared the internal flows for accounting purposes and approved all of the company procedures that had an impact on the economic, financial and equity situation of the Company. During the financial year the Responsible Officer has issued the declarations and attestations specified in article 154-bis of the FSA.

13. INTERESTS OF DIRECTORS AND TRANSACTIONS WITH RELATED PARTIES

The Company has also had rules of conduct for transactions with related parties, including intra-group business, in place since 2002. The purpose of these rules is to guarantee effective procedural and substantial correctness and transparency in transactions undertaken by Pirelli & C., directly or through subsidiaries, with parties related to Pirelli & C. itself.

On the basis of these rules, the Board is called on to approve transactions with related parties and infragroup transactions in advance, when the transactions are not typical or usual and concluded at standard conditions. To this end, the Board receives an adequate report on the nature of the relation, the ways in which the transaction is to be carried out, the conditions, including the economic conditions, for its execution, the evaluation procedure followed, and the underlying reasons and interest, as well as any risks for the company. If the relation is with a Director or with a related party through a Director, the Director concerned must - unless the Board decides otherwise - limit him or herself to supplying clarification, and does not participate in the Board Meeting that will deliberate the transaction. Depending on the nature, value or other characteristics of the transaction, the Board of Directors, to ensure that the transaction is not carried out at incongruous conditions, is assisted by one or more experts who express their opinion on the economic and/or legal and/or technical aspects of the transaction. The Committee for Internal Control and Corporate Governance monitors the respect of the principles that the Company has formulated for execution of transactions with related parties.

Finally, please note that in order to identify what constitutes a related party, the Company - as also indicated by Consob - defines the concept of “related party” according to the IAS/IFRS principles (specifically IAS 24).

The text of the principles of conduct is printed at the end of this Report and is also available in the Governance section of the Company website, www.pirelli.com.

14. BOARD OF STATUTORY AUDITORS

According to the law and the Company bylaws, the Board of Statutory Auditors is entrusted with monitoring the following:

  • compliance with the law and the bylaws;
  • respect for the rules of correct administration;
  • the adequacy of the organisational structure of the Company for the aspects within its competence, of the internal control and administration-accounting system, and of the reliability of the latter to correctly represent the operating results;
  • the ways in which the corporate governance rules specified in the codes of conduct prepared by companies that manage regulated markets or professional associations, which the company declares to follow, are actually implemented;
  • the adequacy of the instructions issued by the Company to its subsidiaries regarding the reporting of price sensitive information[49].

The Board of Statutory Auditors carries out its duties by exercising all of the powers conferred upon it by law and, since it can rely on a constant and analytical information flow from the Company, during and beyond the regular meetings of the Board of Directors and its Committees.

In fulfilling its functions, the Board of Statutory Auditors, besides participating in all the Board of Directors and Shareholders’ Meetings, also takes part in the tasks of the Remuneration Committee and the Committee for Internal Control and Corporate Governance. Moreover, Paolo Domenico Sfameni, a Standing Auditor, became a member of the Supervisory Body in accordance with the legislative decree No. 231/2001.

15. APPOINTMENT OF AUDITORS

The Company bylaws provide that the Board of Statutory Auditors consists of three Standing Auditors and two Alternate Auditors. In order to allow minority shareholders to elect one Standing Auditor and one Alternate, the Company bylaws[50] specify that they are appointed using the so-called the slate system, meaning that one Standing Auditor and one Alternate Auditor are elected from the slate that obtains the second highest number of votes (the so-called the minority slate). The remaining members of the Board (i.e. two Standing Auditors and the other Alternate Auditor) are elected from the slate that obtains the highest number of votes (the majority slate).

Pursuant to the Company bylaws, shareholders who, alone or together with others, hold at least 2% of the share capital entitled to vote at the ordinary shareholders’ meeting that is, the lowest percentage required by CONSOB[51] may present slates.

Pursuant to the Issuer Regulations (article 144-quinquies and subsequent)[52] the slates must be filed at the registered offices of the company at least 15 days before the date of the Shareholders’ Meeting called to deliberate the matter. While the current regulations should be consulted for further details, it is pointed out that if a single slate is presented, or if the several slates presented by shareholders are found to be linked, then slates may be submitted up to five days after the expiry of the date for their presentation (15 days before the shareholders’ meeting) and the thresholds for their presentation are reduced by half.

Each shareholder may present or participate in the presentation of only one slate.

The following must be accompanied by the following, also pursuant to the current regulations:

  • information on the identity of the shareholders who presented the slates, indicating their percentage holdings and a certificate proving that they own such a holding;
  • a declaration by shareholders other than those who hold, including jointly, a controlling interest or relative majority, attesting that there are no links;
  • a professional curriculum vitae for each candidate and 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.

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

Subject to ineligibility, each candidate may only appear on one slate.

Slates must be divided into two sections: one for candidates for the position of Standing Auditors and the other for candidates for the position of Alternate Auditor. The first candidate in each section must be selected from among persons entered in the register of standing auditors who have worked on statutory audits for a period of not less than three years.

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

The Standing Auditor at the top of the minority slate, if presented, is entitled to Chair the Board of Statutory Auditors.

In the event of death, resignation or disqualification of a Standing auditor, he (or she) is replaced by the Alternate Auditor from the same slate. If the Chairman of the Board of Statutory Auditors is to be replaced, the other Standing Auditor elected on the same slate takes the Chair; if it is not possible to proceed in the manner described above, a shareholders’ meeting is called to fill the vacancy or vacancies on the Board of Statutory Auditors by means of a resolution approved by a relative majority of the votes cast.

When the Shareholders’ Meeting must appoint the Standing and/or Alternate Auditors needed to complete the Board of Statutory Auditors, pursuant to the previous paragraph, or to the law, the following procedure must be used: if standing auditors elected from the majority slate are to be replaced, the appointment is made with the favourable votes of a relative majority without being tied to a slate; if, instead, standing auditors elected from the minority slate are to be replaced, the shareholders’ meeting replaces them with the favourable votes of a relative majority, choosing where possible from among the candidates on the slate from which the standing auditor to be replaced was elected The principle of necessary representation of minorities is respected, since the bylaws assure the right to participate in the appointment of the Board of Statutory Auditors, in case of the appointment of Auditors who have been candidates on the minority slate or slates other than those that obtained the highest number of votes in the procedure to appoint the Board of Statutory Auditors.

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

Outgoing Auditors may be re-elected.

Participation in meetings of the Board of Statutory Auditors may be - if the Chairman or his substitute verifies the necessity - by means of telecommunication techniques that permit participation in the discussion and equality of information for all those taking part.

16. AUDITORS

The Shareholders’ Meeting held on 21 April 2006 resolved to renew the Board of Statutory Auditors for the 2006-2008 period, appointing Luigi Guatri, Enrico Laghi and Paolo Francesco Lazzati (the latter as replacement following the resignation of Paolo Domenico Sfameni) as Standing Auditors.

Luigi Guerra and Franco Ghiringhelli were appointed alternate auditors.

The appointments were made with the slate system. The single slate was presented by members of the Pirelli & C. Block Shares Syndicate. The Company considers that the reason why no alternative slate was presented by the minorities is the authoritative and known character of the candidates proposed.

In the absence of members of the Board of Statutory Auditors from the minority slate, the Shareholders’ Meeting decided to confirm the appointment of Luigi Guatri as Chairman of the Board of Statutory Auditors.

The Shareholders’ Meeting also determined that the annual gross fee for each of the Statutory Auditors should be 41,500 euros, and that the gross annual fee of the Chairman of the Board of Statutory Auditors should be 62,000 euros.

It also determined that the Standing Auditor called on to became a member of the Supervisory Body in accordance with the legislative decree No. 231/2001 (Paolo Domenico Sfameni) should receive an additional gross annual fee of 15,000 euros.

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

Nome

Office

Appointed on

Slate

Indep. Self. Reg. Code

Indep. Self. Reg. Code

Luigi Guatri

Chairman

21/04/2006

Maj.

X

100

Enrico Laghi

Standing Auditor

21/04/2006

Maj.

X

100

Paolo Domenico Stameni

Standing Auditor

21/04/2008

*

X

100**

Luigi Guerra

Alternate Auditor

21/04/2006

Maj.

-

-

Franco Ghiringhelli

Alternate Auditor

21/04/2006

Maj.

-

-

LEGEND

* Appointed pursuant to the Company bylaws, without invoking use of the slate voting mechanism since the conditions to do so did not occur.

** Auditor Paolo Domenico Sfameni was appointed by the Shareholders’ Meeting of 29 April 2008, and thus this percentage was calculated based on the number of those meetings held after his appointment that he attended.

Office: indicates whether the person is the chairman, a standing auditor, or an alternate auditor

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

Indep.: if checked indicates that the auditor may be considered independent according to the criteria contained in the Self Regulatory Code, specifying at the end of the table if these criteria have been supplemented or modified

% att. B.S.A.: indicates the percentage of meetings of the board of auditors attended by the auditor

The list of offices held by Auditors in public or private limited companies, and in partnerships limited by shares, is reported in the document attached to the report on supervisory activity drawn up pursuant to article 153 subsection 1 of the FSA contained in the financial report.

It should be noted that on the Date of approval of the Report, the Company had not been informed that any serving Auditor had exceeded the limit of accumulated administration and control offices specified in article 144 terdecies of the Issuer Regulations.

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

Name

Office

Served from / to

Slate

Indep. ex. Code

% att. B.S.A.

Paolo Lazzati

Standing Auditor

From 21/04/2006 to 29/04/2008

Maj.

X

100*

LEGEND

Refer to the legend for the two preceding tables.

* This percentage was calculated taking into account the number of those meetings of the Board of Statutory Auditors that he attended before ceasing to serve compared with respect to those meetings held in the year after his appointment ceased.

In line with the provisions of the Self Regulatory Code[53] and as expressly ascertained by the Board of Statutory Auditors, based on the information provided by the Auditors and the information available to the Board of Statutory Auditors, all Auditors may be defined as independent based on criteria contained in the Code regarding directors. Moreover, during the year the members of the Board of Statutory Auditors considered Consob communication no. 8067632 of 17 July 2008, and promptly confirmed to the Company that they continue to fulfil the requisites for independence also in the light of the content of said communication[54].

Pirelli & C. qualifies its Auditors as related parties for the Company, and thus if an Auditor has an interest in a specific transaction of the Company the “rules of conduct for transactions with related parties” described in the preceding section “Interests of Directors and transactions with related parties” become applicable. It follows that, in accordance with the provisions of the Self-Regulatory Code[55], the Board receives an adequate report on the nature of the relation and the ways in which the transaction will be executed.

During 2008 the Board of Statutory Auditors held 5 meetings attended by all members of the Board. However, it should be noted that the members of this Board also attended the Shareholders’ Meetings and the meetings of the Board of Directors, all of the meetings of the Committee for Internal Control and Corporate Governance and the Remuneration Committee held during the year, as required by the corporate governance rules adopted by the Company, which offer the Board of Statutory Auditors, in its own interest, the possibility of directly following the activities of the Committees and performing their control functions more efficaciously.

During the year, the Board of Statutory Auditors has monitored the observance of the law and the bylaws, the respect of the principles of correct administration and the adequacy of the organisational structure of the Company, the internal control system and administrative-accounting system, as well as the reliability of the latter to correctly represent the operating results.

It also monitored the ways in which the corporate governance rules specified in the codes of conduct prepared by companies that manage regulated markets or professional associations, which the company declares to follow, are actually implemented, and on the adequacy of the instructions given by the Company to its subsidiaries regarding the reporting of price sensitive information[56].

The Board of Statutory Auditors reported the activities it had carried out, and expressed its opinion on those aspects of the Directors’ proposal for the distribution of the 2008 dividend within its field of competence to the Shareholders’ Meeting held on 29 April 2008.

The Board of Statutory Auditors presented its reasoned proposal for the appointment of Reconta Ernst&Young S.p.A. as external auditors of the statutory and consolidated financial statements and abbreviated half-yearly financial reports for the years 2008-2016 to the Shareholders’ Meeting held on 29 April 2008. The Board of Statutory Auditors had previously undertaken an extensive in-depth technical-economic evaluation. This evaluation was performed taking into account a comparative overall analysis of the proposals received, with detailed comparison of (i) the costs and conditions of the mandate; (ii) the mix of personnel employed; (iii) the coverage of the territory and the skills and specific experience, and (iv) the fees proposed for work within the same perimeter. The Board of Statutory Auditors subsequently monitored[57] the independence of the external auditors, checking that the instructions in terms of both the nature and entity of the services other than accounts monitoring provided to Pirelli & C, and its subsidiaries by the external auditors and their network are respected.

The Board of Statutory Auditors has also checked that the criteria and ascertainment procedures adopted by the Board of Directors to assess the independence of its members are correctly applied.

The Board of Statutory Auditors[58] coordinated its activities with the Internal Audit department and, as stated, staff from the latter participated in all the meetings of the Committee for Internal Control and Corporate Governance.

It should be noted that the Shareholders’ Meeting called to approve the financial statements at 31 December 2008 will also be called on to deliberate the renewal of the Board of Statutory Auditors. On this matter, see the Directors’ Report, which will be made available on the company website www.pirelli.com, for greater detail.

17. RELATIONS WITH SHAREHOLDERS

In line with its tradition of transparency and fairness, the Company actively promotes relations with shareholders, institutional and private investors and with financial analysts, with other market operators and with the financial community in general within the proper limits of their respective roles, and periodically organizes meetings with representatives from the Italian and international financial communities.

The Investor Relations division was founded in March 1999 to promote continuous dialogue with the financial markets; Valeria Leone was appointed to run this division in October 2008.

To enable open and immediate dialogue with all those needing information of a financial nature about Pirelli, there is a dedicated Investors section on the Company website (www.pirelli.com), where information for an initial evaluation of Pirelli is available: from the identifying characteristics of the Company to economic-financial data, on the drivers of the various businesses in which the Pirelli Group is engaged to the opinions of financial analysts, from all the documentation made available to meetings with the financial community to accounting and legal information.

To facilitate contact with the Company, Investor Relations has an e-mail address (investorrelations@pirelli.com) and guarantees to reply to all queries received within 24 hours, while the Investors-Contacts section shows the contact details for each member of the IR team, for specific requests from analysts and investors, both individual and institutional.

To facilitate understanding of the strategy and evolution of the business and results produced, the top management of Pirelli &C and Investor Relations use other tools of financial communications, such as roadshows, conference calls, one to one meetings and industry conferences for Group businesses. The Company also has a culture based on the combination of profitability and business sustainability, and takes part in many world indicators assessing the social responsibility of business, and has been acknowledged a leader in this field.

18. SHAREHOLDERS’ MEETINGS

The Shareholders’ meeting - that may be ordinary or extraordinary - has the competence, according to the law, for resolving upon a series of specified matters such as the approval of the financial statements, the election and the revocation of directors and statutory auditors, their fees and responsibilities, the purchase or sale of own shares, the modification of the Company bylaws, the issuance of convertible bonds, and, except for restricted cases, merger and division transactions.

An ordinary Shareholders’ Meeting - which may be held in Italy, not necessarily in the registered office - may be convened within 120 days after the end of the financial year.

In line with the calendar circulated by the Company, the date of first call of the Shareholders’ Meeting is 20 April 2009, and in second call for 21 April 2009.

In addition to the law and the bylaws, Shareholders’ Meetings are governed by the Rules of Proceedings (printed at the end of this Report and available in the Governance section of the Company website, www.pirelli.com), approved by the Shareholders’ Meeting held on 11 May 2004 and subsequently modified by the Shareholders’ Meeting held on 23 April 2007.

In particular, the Rules assign to the Chairman of the meeting the right to grant those shareholders who have requested it, pursuant to the law and the Company bylaws, a period of no longer than 15 minutes to illustrate proposals and explain the reasons for them to be added to the items to be discussed in the Shareholders’ Meeting.

The Shareholders’ Meeting is chaired, in the following order, by the Chairman of the Board of Directors, by a Deputy Chairman or a Managing Director; if there are two or more Deputy Chairmen or Managing Directors, they are chaired by the senior in age. In the absence of the aforementioned individuals, the Shareholders’ Meeting is chaired by another person elected by the shareholders with the favourable vote of the majority of the capital represented at the meeting.

The Chairman of the shareholders’ meeting - among other things - verifies that the meeting has been validly constituted, ascertains the identity of those present and their right to attend, including by way of proxies, ascertains the legal quorum and governs the proceedings, with the faculty to establish a different order for the discussion of the topics listed in the agenda indicated in the notice convening the meeting. The Chairman also takes appropriate action to ensure orderly discussion and voting, establishing the procedures and verifying the results.

The decisions of the meeting are recorded in minutes signed by the Chairman of the meeting and the Secretary or by the Notary public.

The minutes of extraordinary Shareholders’ Meetings must be prepared by a Notary public appointed by the Chairman of the meeting.

Article 7 of the Company bylaws specifies that shareholders’ interventions for which the communication specified in article 2370 subsection two of the Civil Code, within two days of the date of the particular shareholders’ meeting, are legitimate.

The bylaws do not envisage the non-availability of the actions for which the communications mentioned in the aforementioned article 2370, subsection 2 of the Civil Code until the meeting has been held.

With reference to the right of each shareholder to speak on topics raised for discussion, it should be noted that the Rules for shareholders’ meetings provide that the Chairman determines the period of time available to each speaker at the start of the meeting, taking the importance of the individual items on the agenda into account, but in any event no less than 15 minutes. Persons who wish to speak must ask the Chairman or the Secretary, indicating the topic to which the speech refers. The request may be presented up to the moment the Chairman has declared closed the discussion of the matter which the demand to speak refers. Participants may ask to speak a second time during the discussion, for a period of no more than five minutes, solely for the purpose of replying or formulating voting intentions.

As far as the meeting of holders of savings shares is concerned, this is called by the Common Representative of the savings shareholders of the Company or by the Board of Directors every time they believe it to be proper advisable or when its convening is required by the law.

The special meeting of savings shareholders is chaired by the Common Representative of the savings shareholders or, in his absence, by the person elected by a majority of the capital represented at the meeting.

Pursuant to the Company bylaws[59] the Company is responsible for the expenses of organising the special shareholders’ meeting and for the remuneration of the Common Representative.

The savings shareholders’ meeting took place on 28 January 2009 and proceeded to appoint a Common Representative, the mandate of the serving Common Representative having expired. The special shareholders’ meeting confirmed Giovanni Pecorella as Common Representative for the years 2009-2011, determined his remuneration, and approved the creation of a fund for the expenses necessary for the protection of the common interests of the group. When renewing the Common Representative, the savings shareholders’ voted separately on the appointment of the Common Representative and on the determination of his fee.

19. CHANGES AFTER THE CLOSURE OF THE FINANCIAL YEAR

The Report takes into account the changes that have occurred since the end of the financial year to the data of approval of the Report.

[1] Article 10 of the company bylaws.

[2] Also in line with Criterion of application 6.C.1 of the Self Regulatory Code.

[3] CONSOB (CONSOB Resolution no. 16779 of 27 January 2009) 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 2009 financial year as 2% of the capital with voting rights in the ordinary shareholders’ meeting.

[4] The voting list is specified in article 10 of the bylaws.

[5] The minority list was presented by: ARCA SGR SPA (rubrica Fondo Azioni Italia - Rubrica Fondo Arca BB), BNP PARIBAS ASSET MANAGEMENT SGR SPA (BNL Azioni Italia), MONTE PASCHI ASSET MANAGEMENT SGR SPA (Ducato Geo Italia), PIONEER INVESTMENT MANAGEMENT SGR P.A. (Pioneer Azionario Crescita), PIONEER ASSET MANAGEMENT S.A., EURIZON CAPITAL SGR SPA (San Paolo Azioni Italia - Sanpaolo Italian Equity Risk - Sanpaolo Opportunità Italia - Nextra Rendita), EURIZON CAPITAL S.A. (SPI Obiettivo Industria - SPI Obiettivo Europa - SPI Obiettivo Euro - SPI Obiettivo Italia), FIDEURAM INVESTIMENTI S.G.R. S.p.A. (IMI Italy), FIDEURAM GESTIONS S.A. (Fonditalia Global - Fonditalia Equity Italy - Fonditalia Euro Cyclical - Fideuram Fund Equity Italy - Fideuram Fund Europe Listed Industrials Equity), INTERFUND SICAV (Interfund Equity Italy - Interfund Equity Europe Industrials), AMBER MASTER FUND SPC (Managed by Amber Capital LP).

[6] Self Regulatory Code: Criterion of application 1.C0.2.

[7] Self Regulatory Code: Criterion of application 1.C0.3.

[8] Board of Directors meeting of 7 November 2007.

[9] Press release of 7 November 2008.

[10] Article 11 of the company bylaws.

[11] Self Regulatory Code: Criterion of application 1.C.1, lett. a).

[12] Self-Regulatory Code Criterion of application 1.C.1, lett. e).

[13] Article 11 of the company bylaws.

[14] Article 150 of the FSA.

[15] Self-Regulatory Code. Criterion of application 1.C.1, lett. b).

[16] Self-Regulatory Code. Criterion of application 1.C.1.

[17] See the paragraph headed “Committee for Internal Control and Corporate Governance”, below, for further details.

[18] Self Regulatory Code: Criterion of application 1.C.1, lett. d).

[19] As reported in the section entitled “Remuneration of Directors”, the Managing Director and General Manager of Pirelli Tyre, Dr. Francesco Gori, has been categorised, for self-regulatory purposes, as a “director with strategic responsibilities”.

[20] Self Regulatory Code: Criterion of application 1.C.1, lett. f).

[21] Self Regulatory Code: Criterion of application 1.C.1, lett. g).

[22] Self Regulatory Code: Criterion of application 1.C.1, lett. g).

[23] The board performance evaluation was examined in depth in the meetings of the independent directors. Please see the the “Meeting of the independent directors” paragraph under “Direction and coordination activities”.

[24] Cf. Section 5.4 “Other Executive Directors”.

[25] Self Regulatory Code: Criterion of application 2.C0.2.

[26] Self-Regulatory Code. Criterion of application 3.C.5.

[27] Criteria of application 3.C.1 and 3.C.2.

[28] The following may be considered “prominent exponents” of a company or body: the chairman of the body, the legal representative, the chairman of the Board of Directors, the executive directors and managers with strategic responsibilities in the company or body considered.

[29] The following persons are executive directors of the issuer: Chairman Marco Tronchetti Provera and Vice Chairmen Alberto Pirelli and Carlo Alessandro Puri Negri.

[30] The company mandated to audit the accounts of Pirelli & C. is Reconta Ernst&Young S.p.A. a member of the Ernst&Young network(Cf. Section 12.4)

[31] Self-Regulatory Code. Criterion of application 3.C0.6

[32] Self Regulatory Code: Principle 7.P.3.

[33] Also in accordance with the recommendations of the Self Regulatory Code: Criterion of application 5.C.1, lett. d).

[34] Self Regulatory Code: Criterion of application 7.C.4.

[35] Also in line with the provisions of the Self Regulatory Code. Criterion of application 5.C.1, lett. e).

[36] Article 14 of the company bylaws.

[37] Also in line with the provisions of the Self Regulatory Code. Criterion of application 7.C.1.

[38] Vice Chairman Carlo Alessandro Puri Negri is an exception to this, since he is a recipient of stock options in his capacity as Chief Executive Officer of Pirelli RE.

[39] Also in line with the provisions of the Self Regulatory Code. Principle 8.P.4.

[40] Specifically, Mr. Bruni and Mr. Secchi.

[41] Also in line with the provisions of the Self Regulatory Code, Criterion of application 5.C.1, lett. d).

[42] Also in accordance with the recommendations of the Self Regulatory Code: Criterion of application 8.C.4.

[43] Self Regulatory Code: Criterion of application 5.C.1, lett. e).

[44] Some of the initiatives to update the corporate governance tools were reported in the “Corporate Governance Report for the 2007 financial year”.

[45] Refer to the section entitled “Adaptation of article 36 of Consob Regulation 16191/2007, concerning the regulation of markets” included in the interim report on operations at 30 September 2008, also available on the Company internet site.

[46] Cf. Paragraph headed “Internal control system and governance system” in the section entitled “Role of the Board of Directors”.

[47] Also in line with the provisions of the Self Regulatory Code. Criterion of application 8.C.1, lett. b).

[48] Article 11 of the company bylaws.

[49] Now referred to as “sensitive information” (article 114 of the FSA).

[50] Article 16 of the company bylaws.

[51] CONSOB (Resolution no. 16779 of 27 January 2009) 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 2009 financial year as 2% of the capital with voting rights in the ordinary shareholders’ meeting.

[52] In this respect it should be noted that CONSOB has issued Communication no. DEM/9017893 of 26-2-2009, containing some recommendations on the appointment of members of administration and control bodies.

[53] Self-Regulatory Code. Criterion of application 10.C0.2.

[54] CONSOB communication no. DEM/DCL/DSG/8067632 of 17-7-2008 concerning situations of incompatibility for members of control organs pursuant to art. 148, subsection 3, lett. C) of the FSA.

[55] Self-Regulatory Code. Criterion of application 10.C0.4.

[56] Now referred to as “sensitive information” (article 114 of the FSA).

[57] Also in accordance with the recommendations of the Self Regulatory Code: Criterion of application 10.C.5.

[58] Self-Regulatory Code: Criteria of application 10.C.6 and 10.C.7.

[59] Article 6 of the company bylaws.