Pirelli puts corporate governance plan into action

Despite numerous successes in tyre production, green technology and Formula One, Pirelli refuses to rest on its laurels, enforcing a commendable policy plan for years to come

 

Young Italian engineer Giovanni Battista Pirelli established Pirelli & C. in Milan in 1872, opening the company’s first plant for the manufacture of rubber articles the following year. A century and a half later, Pirelli is the world’s fifth-biggest tyre manufacturer in terms of sales, and the world leader in the high-end and high-tech segments.

Pirelli has 20 factories on four continents and operates in more than 160 countries. In 2011 Pirelli began construction of one factory in Mexico, another in Argentina, and purchased a factory in Russia. In line with an industrial tradition going back more than a century, Pirelli aims to achieve ongoing international expansion (in addition to its new international facilities, the company has a multinational management team representing 15 different countries) while maintaining strong roots in the communities where it works.

Pirelli has more than 1,200 researchers and invests about three percent of its annual turnover in R&D – one of the highest levels in the industry. Pirelli also has research agreements in effect with 14 university centres of excellence all over the world. Pirelli stands out for its ability to innovate, the quality of its products, and the strength of its brand (worth more than €2.2bn). Since 2002 this strength has also been supported by Pzero’s fashion and high-tech projects (opening its first flagship store in Milan in 2011), now further supported by Pirelli’s return to Formula One as official supplier for 2011-13, after a 20-year absence. This year, Pirelli was unanimously praised for its contribution to the F1 circus.

Creating a solid structure
In line with its ‘green performance’ strategy, Pirelli focuses on research and development, with a constant and growing focus on top-quality products and services with minimal environmental impact.

The Pirelli name has been associated with the Pirelli Calendar (colloquially known as ‘The Cal’) since 1964. The Cal became a status symbol in just a few years – although in 1974, in the wake of two crises on the oil market, its production was suspended due to severe budget cuts. Thankfully the interruption was only temporary, and the calendar came back on the scene in 1984 after the conclusion of the oil crisis. Since 1994 it has been an integral part of the Pirelli brand, offering ever-new styles and models of beauty.

In view of Pirelli’s excellent financial results for 2011, its planned investments in premium production capacity, its recent organisational changes and the acceleration of its developments in Russia, the company has come up with a 2012-14 industrial plan which aims to achieve significant growth of premium sales within the three-year period.

Investments in 2011-15 are expected to total €2.4bn, increasing productive capacity in the premium segment by 32 million articles. Under the new plan Pirelli is set to achieve total sales of €7.7bn by 2014, with an EBITDA (after restructuring costs) of 19-20 percent, and an EBIT (after restructuring costs) of 15-16 percent.

The goal of the new plan is to further underline the strategic choices already implemented in the 2011-13 industrial plan, with the priority goal of achieving product leadership and making the most of ‘intangibles’ – technology, brand, and human resources. Moreover, the company plans to progressively strengthen its commercial and product roots in fast-growing regions, reinforcing the ‘local for local’ model which allows the company to cut the risk involved in exchange rates and customs barriers, and which has a significant positive impact on profitability.

All these actions will be implemented through a new form of managerial organisation optimised to take into account both Pirelli’s transformation into a ‘pure tyre company’ and the growing complexity of the different business units and geographic macro-areas. The new structure has created an executive office for centralised strategic supervision of all activities; it consists of CEO Marco Tronchetti Provera and COO Francesco Gori, to whom all business structures report.

Direct action
In addition to its capacity for innovation, technological excellence and brand strength, Pirelli can rely on two more important assets: its corporate governance and sustainability, which have been contributing to its value generation and responsible growth over the years. In 1999 Pirelli became one of the first Italian companies to fully comply with the recommendations of the Corporate Governance Code for Listed Companies, established by Borsa Italiana. Awareness of the importance of an efficient corporate governance system to achieve the goal of value creation prompts Pirelli to keep its corporate governance system up-to-date and in line with national and international best practice.
Pirelli’s corporate governance system is based on:
– The central role of the board of directors; Consolidated disclosure of the company’s choices and decision-making processes and an effective internal control system;
– An innovative, pro-active risk management system;
– A system for remuneration and variable compensation of managers, solidly based on medium to long-term economic targets.

Increasing independence
Pirelli’s board of directors plays a central role in defining the company and group’s strategic guidelines, monitoring the performance of top managers and supervising the entire risk management system. The board was renewed in 2011 and once again consists of 18 non-executive and independent directors out of a total of 20. Minorities play a significant role on the board, especially independent directors. In 2004, Pirelli introduced the slate system for appointment of the board of directors, allowing minority shareholders to appoint 20 percent of the directors in office.

Since the board was renewed, four committees have been set up. Two are made up entirely of independent directors (the Remuneration Committee, and the Committee for Internal Control, Risks and Corporate Governance), while the other two (the Nominations Committee and the Strategies Committee) are composed of all executive, non-executive, and independent directors.

The new nominations committee is entrusted with the task of identifying succession plans for top and senior management positions, with the aim of ensuring continuity in business strategies. In addition, the newly-established committee is specifically asked to assist the board in coming up with emergency plans for succession to the positions of CEO and COO, establishing the steps involved and the requirements for identification (within or outside of Pirelli) of professionals qualified to replace these professionals in an emergency.

The Strategies Committee, on the other hand, assists the CEO and the board as a whole by defining strategic business guidelines, and identifying and defining the conditions and terms of particularly important operations. Furthermore, in November 2005, in order to extend the role of the independent directors, the board of directors introduced a Lead Independent Director.

Incentivising risk
Pirelli has introduced a new, proactive risk management model, based on a risk management process which permits prompt and complete identification of risks – and therefore the adoption of appropriate risk management methods which address risks in advance, rather than simply reacting. Pirelli specifically assessed the importance of identifying risks before they arise, and has adopted policies and tools to avoid them or reduce their impact. This governance and control can still recognise that risk-taking is an essential component of operating a business. Pirelli’s risk governance system is therefore fully integrated in the process of strategic planning, and has permitted preparation of a contingency plan in case the slowdown expected in 2012 evolves into a true recession.
Pirelli’s Enterprise Risk Management is based on a methodological approach which is:
– Value Driven: In that the most significant risks analysed are identified in relation to their capacity to affect achievement of the strategic goals included in the strategic plan or compromise critical company assets (key value drivers);
– Top-Down: In that top management plays a key role in the identification of priority risk areas and events with a particularly high impact on the business;
– Quantitative: Based on the accurate measurement of the impact of risks on expected economic and financial results.

When announcing its 2009-11 industrial plan, Pirelli defined a long-term incentives plan which was to align top management’s pay with shareholders’ interests in order to generate value in the medium to long term. When announcing its new industrial plan, Pirelli further reinforced its long-term incentive plan. Under the new plan, payment of a part of the annual incentive is delayed, and made subject to achievement of the group’s three-year targets, establishing a direct link between pay and sustainable long term performance.

Under this new incentives system, more than 70 percent of the variable portion of management’s pay is linked with medium- to long-term targets. A portion of the long-term incentive is also linked with total shareholder return, in order to further strengthen the link between management’s work and the generation of value for shareholders. The economic targets in the industrial plan include the cost of the incentives.

Dow Jones approved
In 2011, one year before the deadline set by law, Pirelli submitted for consultation and approval by its shareholders the company’s policy on determining and monitoring the pay of executive directors, general managers, senior management and management in general.
This policy, which was approved by about 90 percent of the share capital represented at the meeting, is the result of a clear and transparent process, and is aimed at attracting, motivating and retaining human resources with the professional qualities required to profitably pursue the group’s goals; and specifically the goal of creating value in a way that is sustainable in the long term.

Consequently, Pirelli has been included in the Dow Jones Sustainability Stoxx index since 2002, and has been included in the Dow Jones Sustainability World index and the FTSE4GOOD Global and Europe indices for years. In 2011, for the fifth year in a row, Pirelli was declared a world leader in sustainability in the Autoparts and Tyres industry in the Dow Jones Sustainability Stoxx and Dow Jones Sustainability World indices, while Governance Metrics International has awarded Pirelli’s corporate governance on its home market a score of 10/10.