Pirelli & C.

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13. 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 information74.

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, Risks 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.

13.1 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 Bylaws75 specify that they are appointed using the so-called 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 Consob76. may present slates. In this respect, it should be noted that the Company will propose reducing the threshold required by the Bylaws to 1.5% at the Shareholders’ Meeting to approve the 2009 Financial Statements. It will do so to further facilitate submission of slates by minority shareholders, obviously without prejudice to any provision of Consob to apply a lower measure.

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 regulation77, 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 slates 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 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, 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.

It should be noted that the Company will proceed, at the times and in the ways that are considered opportune, to make any necessary changes to the provisions concerning the renewal of company bodies, pursuant to legislative decree 27/2010, that might be applicable for shareholders’ meetings called after 31 October 2010.

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.

13.2 Statutory Auditors

The Shareholders’ Meeting held on 21 April 2009 resolved to renew the Board of Statutory Auditors for the 2009-2011 period, appointing Enrico Laghi, Paolo Gualtieri and Paolo Domenico Sfameni as Standing Auditors, and Luigi Guerra and Franco Ghiringhelli as Alternate Auditors.

The appointments were made with the slate system. The single slate was presented by members of the Pirelli & C Block Shares Syndicate, which received 95% of the votes of the share capital with voting rights represented in the Shareholders’ meeting. In the absence of members of the Board of Statutory Auditors from the minority slate, the Enrico Laghi was appointed as Chairman of the Board of Statutory Auditors.

The Shareholders’ Meeting also determined that the annual gross fee for each of the Standing 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 this Report is indicated in Table 5.

It should be noted that during the financial year Mr. Luigi Guatri served as Chairman of the Board of Statutory Auditors, and ceased to serve due to expiry of his mandate. Given his age, after 33 years’ work with the Group, he decided not to put himself forward as a candidate at the shareholders’ meeting of 21 April 2009.

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 CFL and contained in the financial report.

It should be noted that, on the Date 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.

In line with the provisions of the Self Regulatory Code79 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 director, and also in relation to Consob communication no. 8067632 of 17 July 200879.

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 Code80, the Board receives an adequate report on the nature of the relation and the ways in which the transaction will be executed.

Activities

During the year the Board of Statutory Auditors held 6 meetings (4 after its renewal) with a percentage attendance of 89% of the Auditors (92% in the meetings after its renewal). 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, Risks 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 entirety, 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 information81.

The Board of Statutory Auditors reported the activities it had carried out, and expressed its opinion on those aspects of the Directors’ proposal to cover in full the operating losses formulated by the directors to the Shareholders’ Meeting held on 21 April 2009.

The Board of Statutory Auditors has monitored82 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 Auditors83 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, Risks and Corporate Governance.

74 Now referred to as “sensitive information” (article 114 of the CFL)

75 Article 16 of the company bylaws

76 CONSOB (Resolution no. 17148 of 27 January 2010) 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.

77 Issuer Regulation: article 144-quinquies and subsequent articles. CONSOB has also issued Communication no. DEM/9017893 of 26-2-2009, containing some recommendations on the appointment of members of administration and control bodies.

78 Self-Regulatory Code. Criterion of application 10.C.2

79 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.

80 Self-Regulatory Code. Criterion of application 10.C.4

81 Now referred to as “sensitive information” (article 114 of the CFL)

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

83 Self-Regulatory Code: Criteria of application 10.C.6 and 10.C.7.