Pirelli is the world’s fifth-largest tyre manufacturer based on revenues and one of the oldest Italian multinational companies. Over the years, the company has prospered not only because of its commitment to innovation and technological excellence, but because of its attention to its responsibilities as a member of the communities in which it operates, to the stakeholders with which it interfaces and an awareness of its global responsibilities. In other words, it also pursues excellence in corporate governance and sustainability.
At the end of 2013, Pirelli introduced its new industrial plan for the period 2013-17. The plan represents the strategic evolution of the company’s previous industrial plan, which began in 2011, and arrived in a very different macroeconomic context than its predecessor.
Foreseeing the market’s trend, Pirelli in 2011 had already identified the premium (high performance) tyre segment as the one with the best prospects. That segment, even in a difficult economic climate, continues to grow at a rate three times faster than the non-premium and, thanks to its high margins, has been one of the factors that most contributed to the company’s positive recent results. Overall, premium tyre sales (sizes equal 17 inches and above) represents over 53 percent of car business revenues and over 80 percent of profitability, which is seven percentage points higher, both in terms of revenues and profitability, compared with only two years ago. From 2011 to today Pirelli has:
- Consolidated its partnerships with car makers, building a market share in ‘prestige’ original equipment;
- Increased its weight within the premium segment of the car industry;
- Achieved ‘best in class’ position in the industrial segment in terms of profitability, with an EBIT margin over 13 percent;
- Consolidated its position in rapidly developing economies. Activities in these countries today represents over 56 percent of total revenues and more than 63 percent of profits;
- Developed a structure suited to the implementation of a new business model focused on the shift from a logic of ‘volumes’ to one of ‘value.’
Pillars of governance
Pirelli has evolved in terms of its shareholder structure and governance. With regard to the shareholder structure, the weight of foreign institutional shareholders has grown from 16 percent in 2009 to 36 percent today; the free float has gone from 49.3 to 73.8 percent as a consequence of the dissolution of the Shareholder Block Agreement. Meanwhile, Camfin, with 26.2 percent, remains Pirelli’s biggest shareholder (see Fig. 1).
The system of governance at Pirelli is built on six key pillars: (i) the central function of the board of directors, responsible for the strategic guidance and supervision of the company’s overall business; (ii) the central role of independent directors, who represent the majority of the members of the board of directors; (iii) an effective internal control system; (iv) a pro-active risk management system; (v) a remuneration system; and (vi) strict discipline concerning potential conflicts of interest and solid principles of conduct to execute transactions with related parties.
For the execution of its activities, the board of directors has the support of four special board committees, two of which are entirely composed of independent directors. The other two committees are composed of all executive, non-executive and independent directors. Among its duties, the nominations committee has the task of examining the corporate processes relating to the identification, management and development of ‘talents’, which ensures the group has a ‘natural source’ of in-house growth over time, thereby ensuring a constant generational change.
Alongside its product range and the value of its name, the group’s corporate governance and sustainability have always contributed to value generation and responsible growth. Pirelli’s efforts were acknowledged in 1999 when it became one of the first Italian companies to fully comply with the recommendations of Borsa Italian’s Corporate Governance Code for Listed Companies. Since then, Pirelli has always aimed to be up-to-date with governance best practice.
An advanced sustainability governance system allows Pirelli to effectively manage the economic, social and environmental impact of its processes, products and services, with a constant focus on innovation and risk prevention. Pirelli has developed its sustainability model in accordance with the United Nations Global Compact of which Pirelli has been an active member since 2004, and the ISO 26000 guidelines.
With a vision for 2020, Pirelli’s sustainability plan was developed in accordance with the ‘value driver’ model inspired by the UN PRI (Principles for Responsible Investment) and UN Global Compact to encourage dialogue between investors and firms on sustainability issues. The key business metrics used to determine the return on investment of corporate sustainability activities in the 2013-20 plan include revenue growth from sustainability-advantaged products, savings and cost avoidance from sustainability-driven productivity initiatives and the reduction of sustainability-related risk exposure.
Revenues from ‘green performance’ products represented 42 percent of Pirelli’s tyre revenues in 2013, reduction of the injury frequency indicator was reached two years ahead of time and the recycling of production waste is in line with the targets of the 2011-13 plan. The company’s 2014-17 sustainability plan, which sets a number of targets for 2020, foresees:
- Revenues from ‘green’ products in 2017 equal to 48 percent of tyre revenues;
- 90 percent reduction in the injury frequency indicator by 2020 compared with 2009. This target will be reached thanks to investments in increasingly safer equipment, as well as programmes to reinforce the culture of security among employees;
- 15 percent reduction in CO2 emissions by 2020;
- 18 percent reduction in the specific energy consumption ratio by 2020;
- 58 percent reduction in the specific water use ratio by 2020;
- Recycling of production waste above 95 percent by 2020;
- The maintenance of investment in research and development, equal to seven percent of premium revenues, dedicated to the development of safer products with low environmental impact.
Risk management model
Pirelli has adopted a proactive risk management model, based on a risk management process that permits a prompt and complete identification of risks, addressing risks in advance, rather than simply reacting. The model is built on three risk families, as outlined below.
[T]he company has prospered not only because of its commitment to innovation and technological excellence, but because of its attention to its responsibilities
Risks associated with the external environment in which the company operates, the occurrence of which is outside the company’s control. This category includes the risk areas related to macroeconomic trends, the development of demand, strategies adopted by competitors, technological innovations, the introduction of new legislation and the risks associated with the country (economic, political and environmental). The risk management objective is to monitor risk and mitigate potential impact. The control model is based on the adoption of internal/external tools to identify and monitor risk, stress tests to assess the robustness of the plans, the construction of alternative scenarios to the ‘base’ scenarios, business cases to assess the impact of significant changes to the environment conditions, and others.
The second type of risk is strategic risks; namely, risks characteristic of the reference business, the correct management of which is a source of competitive edge, or otherwise the cause of failing to achieve planned targets. This category includes the risk areas associated with the market, product and process innovation, price volatility of raw materials, production processes, financial risks and risks associated with M&A operations. The risk management objective is to manage the risk using specific tools and safeguards designed to reduce the probability of risk or to limit the impact if something occurs. The control model is based on identifying and measuring profit/cash flow/risk when preparing strategic/management plans; defining the risk appetite and the risk tolerance for the main risk events; introducing key risk indicators in group reporting; and monitoring the mitigation plan in relation to significant risk events in the absence of specific business safeguards that are already operational.
Third: operational risks. Specifically, those risks generated by the organisational structure, by the processes and by the group systems, assuming these risks do not produce any competitive edge. The main risk areas in this category refer to information technology, security, business interruption, legal and compliance, health, safety and environmental. The risk management objective is to manage these risks through internal control systems.
Finally, Pirelli’s incentive plan is designed to align top management’s pay with shareholders’ interests in order to generate value in the medium- to-long-term. Under the latest 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. In fact, more than 70 percent of the variable portion of management’s pay is link with medium- to long-term goals and a portion is also linked to total shareholder return, strengthening the link between management work and the generation of value for shareholders.
That segment, even in a difficult economic climate, continues to grow at a rate three times faster than the non-premium
Pirelli has taken its respected brand into over 160 countries. It has 22 production facilities located on four continents and counts about 36,000 employees. It is one of the leading producers of high-end and ultra-high-end tyres, segments in which it aims to become world leader by 2015. The company has a great commitment to research and development, an area in which it invests three percent of its total revenues and seven percent of its top-of-the-range revenues, one of the highest levels in the sector. In pursuing its goals, Pirelli has always aimed to combine economic profitability and social responsibility. And in line with its generations’ industrial tradition, Pirelli continues to invest in international expansion projects while at the same time maintaining strong local roots.
The group has more than 1,200 researchers and a number of R&D centres around the world. It also has research agreements with 14 universities worldwide and continues to attract talented people, both as employees and external collaborators, because of its ability to innovate, the quality of its products and the strength of its name. In fact, the Pirelli brand has been valued by independent analyst Interbrand at more than €2.2bn. That value stems primarily from the consistent quality of its products over the years, but is supported by a number of other high level and related activities, such as the Pirelli calendar, its involvement in motorsports, particularly Formula One, and, more recently, its return to industrial design applied top fashion.
The company has been active in sporting competitions since 1907 and this culminated two years ago with its return to F1 as sole supplier after an absence of 20 years. When Pirelli was awarded the F1 contract for the three-year period 2011-13, it came with the challenge of making the sport more exciting. This was done by providing the teams with a selection of tyres which, while performing optimally in terms of speed, grip and braking, was deliberately designed to degrade more quickly than regular tyres. This was no small technical challenge and its successful realisation has brought the tyre strategy to centre of the overall race strategy, further enhancing the company’s reputation.