Pirelli returns to F1

In 1872, a young Italian engineer called Giovanni Battista Pirelli established Pirelli & C. in Milan and opened a plant manufacturing rubber articles. A century and a half later, Pirelli is now the world’s fifth largest tyre company in terms of sales, and a leader in high-end and high-tech development.

Pirelli now has 20 plants on four continents, working in more than 160 countries all over the world, with a research centre in Italy and eight application centres the world over. It has more than 1,000 people working in research and development, and will continue to invest about three percent of its annual revenues in research over the next three years: one of the highest rates in the sector.

Continuing an industrial tradition more than a century old, the group focuses on ongoing international expansion (as in Russia and Mexico), while maintaining strong roots in the local communities it works in.
Pirelli stands out for its ability to innovate, quality products and brand strength. Since 2002 the brand has been supported by the PZero fashion and high-tech project, and now it has been given a further boost by the company’s return to Formula One, after a 20 year absence, as exclusive supplier for 2011-13.

Pirelli focuses on research and development in line with its green performance strategy, maintaining a growing focus on top quality high-tech products and services with a low environmental impact. Its activity in this area is supported by Pirelli EcoTechnology, active in the areas of emissions control technologies, and Pirelli Ambiente, concerned with energy and environment.

The name Pirelli has also been associated with the Pirelli Calendar ever since 1964. Within a few years ‘The Cal’ became a status symbol, although in 1974 severe budget cuts due to two oil crises forced the company to suspend publication. But the interruption was temporary. After the oil crisis, the calendar made a comeback in 1984, and it has been an integral part of the Pirelli brand since 1994.

In its 40 years of history, the Pirelli Calendar has proposed an astonishing array of styles and models of beauty. And now, after 38 editions, it is still a reference point epitomising the changes and transformations of our society. In 2011 the 38th Pirelli Calendar, reflecting the creative genius of Karl Lagerfeld, was presented to the press, guests and collectors from all over the world in Moscow.

Responsibility in business
At the end of 2010, Pirelli presented the financial community with its new 2011-13 Industrial Plan, with a vision for 2015, after meeting the goals of the challenging 2009-11 Industrial Plan a year in advance.

The new plan requires Pirelli to achieve total revenues of more than €6.05bn, with an EBITDA after restructuring costs of 15-16 percent, and an EBIT after restructuring costs of 10.5- 11.5 percent in 2013. Investment in 2011-15 is to reach €1.9bn. In accordance, Pirelli is to settle at a total productive capacity of 77 million pieces in 2013, with the goal for total capacity in 2015 at around 88 million pieces.

The Pirelli Group combines economic profitability with social responsibility in pursuit of its goals. Corporate governance plays an essential role in this. In 1999, Pirelli became one of the first Italian companies to fully implement the ‘Code of Conduct for listed companies’ recommended by Borsa Italiana SpA, the Italian stock exchange. Awareness of the importance of an adequate system of corporate governance in order to achieve the goal creating value drives Pirelli to keep its corporate governance system constantly in line with the ongoing evolution of standards and best practices in Italy and abroad.

Pirelli’s corporate governance system is based on the following milestones:
i) central position of the board of directors as the authoritative organisation in charge of company management;
ii) consolidated disclosure practices regarding decision-making choices and procedures which are entirely compliant with legislative regulations and an effective system of internal control;
iii) an innovative and pro-active risk management system;
iv) a system providing incentives for managers which is clearly linked with medium- and long- term goals; and
v) effective monitoring of potential conflicts of interest and a rigorous code of conduct regarding the implementation of transactions with related parties.

Pirelli’s board of directors plays a central role in the definition of the company’s and group’s strategic guidelines. Made up of 90 percent (18 out of 20) non-executive and independent directors, the board monitors the performance of top managers and supervises the entire risk management system.

Minority shareholders and independent directors have considerable weight on the board.

Pirelli introduced list voting for appointment of the board of directors in 2004, allowing minority shareholders to elect 20 percent of the directors in office.

The committee includes two board committees (the Internal Auditing, Risks and Corporate Governance Committee and the Remuneration Committee) composed exclusively of independent directors. In November 2005, the board of directors introduced the position of Lead Independent Director to further emphasise the independent directors’ role.

Risk governance
The new risk management model introduced by the Pirelli Group is a pro-active model aimed at guiding decision-making and adoption of tools for preventing, mitigating and in all cases handling the most significant risk events, considering risk assumption an essential component of company management.

Pirelli’s Risk Governance System is based on a specific methodological approach:
i) Value driven: in that the most significant risks analysed are identified in relation to their potential impact on achievement of the Group’s strategic goals as set forth in the Industrial Plan or to affect critical company assets (key value drivers);
ii) Top-down: in that top management performs the role of guiding identification of top priority risk areas and the events with the greatest impact on the business;
iii) Quantitative: that is, based on precise measurement of the impact of risks on expected economic and financial results.

In line with this, the most significant risk events identified by top management are subjected to careful analysis with the involvement of middle management, whether managers of central staff functions, regional or country managers. This permits representation in line with the Pirelli Group’s organisational structure, present in both mature and emerging markets, and allows the board of directors to define target levels of exposure to high priority risks. It also allows for risk management strategies to be drawn in line with the existing propensity for risk (transferring, reducing, eliminating or mitigating risk) and for plans of action and guidelines for a form of management to be aimed at keeping exposure levels within target limits.

The results of the assessment conducted by middle management are analysed and consolidated at the central level by top management and become, along with the corresponding mitigating actions, an integral part of the Annual Risk Management Plan incorporated in operative management.

On launching the 2009-11 Industrial Plan, Pirelli defined a long term incentive plan intended to align remuneration with creation of value.

Pirelli further reinforced its long term incentive programme on the occasion of the launching of the 2011/2013 Industrial Plan. The new Long Term Incentive programme defers payment of part of the annual incentive and makes payment of the final incentive subject to achievement of three-year goals, creating a direct link between remuneration and sustainable medium to long term performance.

Under the new incentives system adopted by Pirelli, more than 70 percent of management’s variable pay is linked with medium to long-term goals. Part of the long term incentive is also tied to total shareholder return, in order to further align management’s work with creation of value for shareholders. The economic targets of the Industrial Plan take into account the cost of the incentives.

In view of this, Pirelli has been included in the Dow Jones Sustainability STOXX index since 2002 and has also been included in the world-wide Dow Jones Sustainability World index for several years. In 2010, for the third year in a row, Pirelli was declared a world-wide leader in sustainability in the ‘Autoparts and Tyres’ sector and a Gold Class company by the Sustainability Asset Management Group in the prestigious Sustainability Yearbook 2010. Finally, Pirelli has been included in the FTSE4GOOD Global and Europe indexes since 2002.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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