Other Information (part 1)

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12.1 Annual Corporate Governance Report - 2008

GLOSSARY

Code: the Corporate Governance Code for listed companies approved in March 2006 by the Corporate Governance Committee and promoted by Borsa Italiana S.p.A. (the Italian Stock Exchange).

Civ. cod./c.c.: the Italian Civil Code.

Board of Statutory Auditors: the Board of Statutory Auditors of Pirelli & C. Real Estate S.p.A..

Board of Directors: the Board of Directors of Pirelli & C. Real Estate S.p.A..

Financial Reporting Officer: the Financial Reporting Officer required by art. 154-bis of TUF.

Issuer: Pirelli & C. Real Estate S.p.A. or Pirelli RE or the Company.

Year: financial year to which this Report refers.

Instructions accompanying the the Instructions accompanying the Regulations for Markets organized and managed by Borsa Italiana S.p.A.

Standards of conduct or Standards: the standards of conduct for transactions with related parties and for real estate transactions.

Stockmarket Regulations: the Regulations for Markets organized and managed by Borsa Italiana S.p.A..

Issuer Regulations: the Regulations for issuers, adopted by CONSOB (Italy’s Stock Exchange Commission) in its resolution 11971 of May 14th, 1999 and subsequent amendments and additions thereto

Market Regulations: the Regulations for markets, adopted by CONSOB in its resolution 16191 of October 29th, 2007 and subsequent amendments and additions thereto.

Report: the Corporate Governance Report that companies are required to prepare by TUF, the Issuer Regulations and art. IA.2.6. of the Instructions accompanying the Stockmarket Regulations.

Website: the Company’s website www.pirellire.com.

TUF: Decree 58 dated February 24th, 1998 and subsequent amendments and additions thereto (Testo Unico della Finanza - Financial Markets Consolidation Act).

1. ISSUER PROFILE

The Company’s structure of corporate governance is based on the “traditional” system of management and control, in which the Board of Directors is exclusively responsible for management while the Board of Statutory Auditors controls the actions of management and an auditing firm, listed in the special register kept by CONSOB, performs the independent audit of the accounts. In compliance with the Code’s recommendations and corporate governance standards adopted internationally and recommended by the European Union, the Board has also set up a number of offshoot committees with proposal-making and advisory functions.

The meeting of Pirelli RE shareholders held on April 14th, 2008 set the size of the Company’s Board of Directors at 15 members with a three-year term in office. One-fifth of the directors may be elected by a shareholder minority, provided they own at least 2% of ordinary shares (or such lower limit required by CONSOB regulations) and have submitted a list of candidates (1). The Board is appointed using a list voting system and the directors are subject to legal provisions regarding ineligibility and term in office, in compliance with the requirements of law and the Articles of Association. No minority lists were presented for the appointment of the current Board of Directors.

The Board of Directors is the body vested with the broadest powers for the Company’s ordinary and extraordinary management (2) and performs all the duties envisaged by art. 1.C.1. of the Code.

The Board of Statutory Auditors is the body charged with monitoring the Company’s observance of the law and its Articles of Association, its respect for correct management practice, the adequacy of its internal control system and its organizational, administrative and accounting structure and the reliability thereof. It is also required to monitor how the corporate governance rules adopted by the Company have been actually implemented and to express a justified recommendation to the Shareholders’ Meeting on the appointment of the auditing firm, and to monitor the independence of such firm.

In accordance with the Articles of Association, the Board of Statutory Auditors consists of 3 standing auditors and 2 alternate auditors, appointed for a three-year term and eligible for re-election. One standing auditor and one alternate auditor may be elected by a shareholder minority provided they own at least 2% of ordinary shares (or such the lower limit required by CONSOB regulations for appointing directors) and present a list of candidates, in compliance with legal and regulatory provisions, with the statutory auditor presented by the minority becoming Chairman of the Board of Statutory Auditors (3). No minority lists were presented for the appointment of the current Board of Statutory Auditors.

The Shareholders’ Meeting is the body which represents all the shareholders and which must pass resolutions (i) in ordinary session, to approve the annual financial report, to appoint and remove members of the Board of Directors, to appoint members of the Board of Statutory Auditors and their Chairman, to determine the fees of directors and statutory auditors, to engage the independent auditors, on the liability of directors and statutory auditors and on other matters falling under its prerogative; (ii) in extraordinary session, to amend the Articles of Association and on corporate actions such as capital increases, mergers and spin-offs, except as legally delegated to the Board of Directors in the Articles of Association.

An auditing firm, listed in the special register kept by CONSOB, is responsible for carrying out the independent audit of the financial statements, in accordance with law. The Shareholders’ Meeting is responsible for appointing this firm, at the justified recommendation of the Board of Statutory Auditors.

2. INFORMATION ON OWNERSHIP STRUCTURE (pursuant to art. 123-bis TUF)

Structure of share capital

Amount of subscribed and paid-in share capital at March 5th, 2009: 21,298,616.00 euro.

Classes of shares making up share capital: ordinary, registered and freely transferable with a par value of 0.50 euro each. There are no other classes of share.

The Shareholders’ Meeting called to approve the financial statements for 2008 will also express its opinion - in extraordinary session - on the proposal to increase share capital, on a divisible basis, by a maximum amount of 400 million euro by issuing ordinary shares with a par value of 0.50 euro each, with normal entitlements, to be offered under pre-emption to shareholders.

The shareholders will be requested, inter alia, to grant the Board of Directors every power to: (i) establish the issue price, based on prevailing market conditions at the time of effectively starting the operation, the market price of Pirelli RE ordinary shares, and market practice for similar operations, on the understanding in any case that - as required by applicable legal provisions - the issue price of the new shares cannot be lower than their par value of 0.50 euro; (ii) determine, depending on the issue price fixed, the maximum number of new-issue shares; (iii) determine the ratio in which new-issue shares will be offered to the Company’s shareholders, taking account of the fact that treasury shares are excluded from this calculation, having no pre-emption rights; (iv) determine the calendar for executing the resolution to increase capital, which must take place by December 31st, 2009 at the latest.

Significant interests in share capital

Based on the declarations received under art. 120 of TUF and other available information, the following shareholders held more than 2% of Pirelli RE’s share capital at March 5th, 2009:

^(*) Refers to the treasury shares held at December 31st, 2008.

Note: The Company does not own any shares in its parent company at December 31st, 2008, including through nominee companies or other third parties, nor has it acquired or sold any such shares during the year, including through nominee companies or other third parties (pursuant to art. 2428 para. 3, points 3 and 4 of the Italian Civil Code).

Shareholder agreements

There are no known shareholder agreements pursuant to art. 122 of TUF.

Appointment and replacement of directors and amendments to Articles of Association

As regards the appointment of directors, the Company’s Articles of Association have established the use of the “list voting system” since 2004, using a transparent procedure that complies with the recommendations of art. 6.P.1. of the Code and now required by law in TUF’s new art. 147-ter, with the purpose of fostering additional involvement in its management by persons designated by the so-called minority, by giving it the right to appoint one-fifth of the directors if at least two candidate lists are presented in accordance with the procedures specified in art. 12 of the Articles of Association.

The lists may be submitted only by those shareholders who, alone or together with other shareholders, are the owners of shares representing at least 2% of share capital with voting rights at the ordinary shareholders’ meeting (or such lower limit required by CONSOB regulations) and must be filed at the Company’s registered office at least 15 days before the date of the Shareholders’ Meeting in first call.

The lists must be accompanied at the time of filing by a curriculum vitae for each candidate, along with statements in which the candidates accept their candidacy and certify that there are no reasons of ineligibility and incompatibility preventing them from holding office and that they satisfy the requirements prescribed for the office. These statements also specify whether the candidates meet the criteria for them to qualify as independent.

The ordinary provisions of law apply to amendments to the Articles of Association.

Authority to increase share capital and authorizations to buy back shares

An Extraordinary Shareholders’ Meeting held on May 10th, 2004 empowered the directors to increase share capital for cash in one or more instalments by the ultimate date of May 9th, 2009, by up to a maximum of 15 million euro at par, with or without a share premium, by issuing up to 30,000,000 (thirty million) ordinary shares, to be offered under option to shareholders and convertible bondholders, with the possibility of excluding pre-emptive rights, pursuant to the combined provisions of the last paragraph of art. 2441 of the Italian Civil Code and para. 2, art. 134 of TUF, if the shares are offered for subscription to employees of Pirelli & C. Real Estate S.p.A. or its subsidiaries.

The same Extraordinary Shareholders’ Meeting of May 10th, 2004 also gave the directors the authority to issue, in one or more instalments by the ultimate date of May 9th, 2009, bonds convertible into ordinary shares, or warrants to subscribe to such shares to be offered in option to shareholders and convertible bondholders, for a maximum amount of 15 million euro within the limits allowed by prevailing law on each occasion, with a consequent increase in share capital to service the conversion of bonds and/or exercise of warrants.

The resolutions to increase capital approved by the Board of Directors under the exercise of the powers granted above establish the subscription price (inclusive of any share premium) and the specific deadline for subscription to the shares; they also establish that, if the approved increase is not fully subscribed by the deadline that is specifically set on each occasion, the capital will be increased by an amount equal to the subscriptions received by that deadline.

The authority under these resolutions expires on May 9th, 2009, being the end of the maximum five-year term permitted in law; also in view of the proposed capital increase being presented to the shareholders at their meeting called to approve the financial statements for 2008, the Board of Directors has decided at this moment in time not to propose renewing the above authority.

The Shareholders’ Meeting held on April 14th, 2008 adopted a resolution authorizing the Board of Directors, under art. 2357 et seq of the Italian Civil Code, to purchase, for a period ending on the date of approving the financial statements for 2008, the Company’s ordinary shares up to the maximum legal limit of 10% of share capital at a price per share of no more than 15% above or below the weighted average official price reported in the three trading sessions prior to each transaction. As required by law, the related buy-back programme was duly communicated to the market on the same date of April 14th, 2008.

The Shareholders’ Meeting also voted, in compliance with prevailing legislation, to grant the Board of Directors the power to purchase treasury shares (up until the date of the Shareholders’ Meeting called to approve the financial statements for 2008) and to dispose of treasury shares, already held or subsequently purchased under the above resolution (with no time limits), including to service existing share-based compensation schemes, for which the related information memoranda prepared under art. 84-bis of the Issuer Regulations can be found on in the Corporate Governance section of the Website.

The Board of Directors decided on March 5th, 2009 to propose that the Shareholders’ Meeting called to approve the financial statements for 2008 be requested to renew the authority to purchase treasury shares and the methods of their disposal.

The Company held 1,189,662 treasury shares at December 31st, 2008, corresponding to 2.793% of share capital. The number of treasury shares at March 5th, 2009 was 1,189,662, corresponding to 2.793% of share capital.

Change of control clauses

Among the significant agreements to which the Company is party and which contain change of control clauses are:

the licensing agreement with Pirelli & C. S.p.A. for Pirelli RE to use the “Pirelli” trademark, which will last as long as Pirelli & C. S.p.A. has direct or indirect control of the Company;
two agreements made by the Company with the Royal Bank of Scotland and West LB for two revolving credit lines of 50 million euro each, both of which contain an immediate repayment clause, whereby if Pirelli & C. S.p.A. loses legal control over Pirelli RE, the bank is entitled to cancel the facility;
two agreements made by the Company with Unicredit Corporate Banking for two revolving credit lines of 50 million euro and 100 million euro respectively: (i) the first agreement includes an immediate repayment clause, whereby if Pirelli & C. S.p.A. loses legal control over Pirelli RE, the bank is entitled to cancel the facility; (ii) the second agreement includes a mandatory early repayment clause, under which if Pirelli & C. S.p.A. loses legal control over Pirelli RE, the credit currently drawn down must be repaid early and/or the credit facility itself will be cancelled.

an agreement made by the Company with IntesaSanpaolo for a credit line of 30 million euro, which includes a mandatory early repayment clause, whereby if Pirelli & C. S.p.A. loses legal control over Pirelli RE, the credit currently drawn down must be repaid early.

3. COMPLIANCE

Since its very formation Pirelli & C. Real Estate S.p.A. has had a system of corporate governance, designed to manage and control the Company in line with best market practice, and which clearly establishes the division of roles and rights between the various corporate bodies in order to ensure compliance with laws, regulations, codes of conduct and in-house rules and procedures.

The Company announced on May 3rd, 2002 that it had adopted the Code and later adopted the subsequent revised version issued in July 2002. Following the publication of the new Corporate Governance Code - 1st edition March 2006 - the Company announced on November 6th, 2006 that it had fully adopted the same, having moreover established that its existing model of corporate governance was largely already compliant with the recommendations contained in the new Code and having started to implement the necessary steps to make it fully compliant.

In compliance with the provisions of Section IA.2.6 of the Instructions accompanying the Stockmarket Regulations, this Report, submitted for approval of the Pirelli RE Board on March 5th, 2009, seeks to provide a full description of the corporate governance model adopted by the Company at the date of its publication, while also providing details of its current state of compliance with the Code.

Periodically and at least once a year at the Board meeting called to examine the draft annual financial statements, the Board of Directors is presented with a summary of the status of compliance with the Code for each of its provisions, including relative to the last review, and specifying any actions in progress or planned; this summary is examined before approving the Annual Corporate Governance Report. In view of the declaration to the market of full adoption of the Code, this summary also ensures a better record of the review carried out.

The fundamental documents forming the basis of the Pirelli RE corporate governance model include:

the Articles of Association;
the Rules for Shareholders’ Meetings;
the Ethical Code and Code of Conduct, forming an integral part of the Organizational Model adopted under Decree 231/01;
the Guidelines for compliance with the obligations under para. 1, art. 150 of Decree 58/1998;
the Standards of conduct for transactions with related parties. Standards of conduct for real estate transactions;
the Guidelines for handling and publishing price sensitive information and related list of persons with access to price sensitive information;
the Memorandum on internal dealing.

For the purposes of fostering the widest possible knowledge of the Company’s corporate governance model, all the above documents are published in full in the Corporate Governance section of the Website www.pirellire.com.

4. CO-ORDINATION AND DIRECTION ACTIVITIES

The Company is under the legal control of Pirelli & C. S.p.A. which owned 56.451% of share capital at the date of March 5th, 2009.

From 2004 until 2008, even though Pirelli & C. S.p.A. had control of Pirelli RE within the meaning of art. 2359 of the Italian Civil Code, the Board of Directors of Pirelli RE and its parent Pirelli & C. S.p.A. were of the opinion, based on actual circumstances, that Pirelli & C. S.p.A. did not carry out direction or co-ordination activities in respect of Pirelli RE and so the presumption contained in the Italian Civil Code was deemed not applicable. The outcome of these evaluations and the related reasons were last communicated to the public by these two companies in their annual corporate governance reports for 2007.

However, in view of the organizational changes and certain facts and circumstances in Pirelli RE of late, this evaluation has been reconsidered by the Boards of Directors of both these companies.

In fact, the major changes in the organizational set-up and strategy resulting in the preparation of the new Industrial Plan for 2009-2011, presented to the financial community on February 11th, 2009, display significant integration and co-ordination with the parent Pirelli & C. S.p.A..

In particular, it was found that Pirelli & C. S.p.A. now plays a key role:

in deciding long-term strategic plans and annual budgets (notably, in preparing and approving the Industrial Plan);
in evaluating and making decisions relating to finance, like for decisions to raise risk capital;
through the appointment of Claudio De Conto, the Chief Operating Officer of Pirelli & C. S.p.A., to the position of Managing Director Finance of Pirelli RE;
in determining the Group’s principal operational policies, including those for the purchase of assets and services on the market;
in co-ordinating business ventures and operations in the various sectors in which the Company (and its subsidiaries) operates, and in the related investment and disinvestment decisions.

In view of the above, the past evidence contradicting the presumption under art. 2497-sexies of the Italian Civil Code is no longer valid.

Therefore, considering that Pirelli & C. S.p.A. controls Pirelli RE, within the meaning of art. 2359 of the Italian Civil Code, and consolidates its financial statements, and given the absence of evidence contradicting the presumption under art. 2497-sexies of the Italian Civil Code, Pirelli RE can now be considered to be as under the direction and co-ordination of Pirelli & C. S.p.A..

5. BOARD OF DIRECTORS

5.1 Composition

The current Board of Directors, appointed on April 14th, 2008, was elected on a list presented by the controlling shareholder in the absence of minority lists, has 15 members - whose related curricula vitae are published in the Website’s Corporate Governance section - and will remain in office until the Shareholders’ Meeting called to approve the financial statements for the year ended December 31st, 2010.

Following the intervening resignation of Dolly Predovic, on March 5th, 2009 the Board of Directors appointed in her place Valter Lazzari - a university lecturer and President of the Faculty of Economics of Castellanza University - and evaluated his independence and expertise in accounting and finance. This nomination had been previously evaluated by the Audit and Corporate Governance Committee, which had presented its recommendations to the Board of Directors. The appointment was also approved by the Board of Statutory Auditors in this same Board meeting. On the same date the Board of Director also appointed Valter Lazzari to the Audit and Corporate Governance Committee, based on the requirements of art. 8.P.4 of the Code.

The Board of Directors therefore currently has the following members:

Key

List: indicated as M/m depending on whether the director was elected on a Majority list (M) or a minority list (m) (art. 144-decies of the Issuer Regulations)

Exec.: marked if the director qualifies as executive

Non exec.: marked if the director qualifies as non-executive

Indep.: marked if the director qualifies as independent under the Code’s criteria

Indep. TUF: marked if the director meets the independence qualifications established by para. 3, art. 148 of TUF (art. 144-decies of the Issuer Regulations)

% BoD: indicates the director’s attendance record in percentage terms at Board meetings (the calculation of this percentage reflects the number of meetings attended by the director relative to the number of Board meetings held during the year or after the director’s appointment)

Other appointments: indicates the total number of appointments held in other companies listed on regulated markets (in Italy or abroad), in financial, banking, insurance or large companies, identified on the basis of the criteria established by the Board of Directors. The list of these companies for each director is appended to this Report, indicating whether the company in which the appointment is held is a member of the group headed by the Issuer.

Key

EC: Executive Committee; C/M for Chairman/Member of Executive Committee.

% EC: indicates the director’s attendance record in percentage terms at Executive Committee meetings (the calculation of this percentage reflects the number of meetings attended by the director relative to the number of Executive Committee meetings held during the year or after the director’s appointment to this committee)

N.C.: Nominations Committee; C/M for Chairman/Member of Nominations Committee

% N.C.: indicates the director’s attendance record in percentage terms at Nominations Committee meetings (the calculation of this percentage reflects the number of meetings attended by the director relative to the number of Nominations Committee meetings held during the year or after the director’s appointment to this committee)

C.C.: C/M for Chairman/Member of Compensation Committee

% C.C.: indicates the director’s attendance record in percentage terms at Compensation Committee meetings (the calculation of this percentage reflects the number of meetings attended by the director relative to the number of Compensation Committee meetings held during the year or after the director’s appointment to this committee)

A.C.: C/M for Chairman/Member of Audit and Corporate Governance Committee

%. A.C.: indicates the director’s attendance record in percentage terms at Audit and Corporate Governance Committee meetings (the calculation of this percentage reflects the number of meetings attended by the director relative to the number of Audit and Corporate Governance Committee meetings held during the year or after the director’s appointment to this committee)

^(*) Appointed by the Board of Directors on December 16th, 2008, previously Deputy Chairman and Chief Excecutive Officer.

^(**) Appointed by the Board of Directors on December 16th, 2008, previously company’s Director.

^(***) Appointed by Board of Directors on May 27th, 2008, previously company’s Director.

^(****) Appointed also as General Manager Germany & Poland.

Maximum number of appointments allowed in other companies

In view of the provisions contained in art. 1.C.3. of the Code, on November 7th, 2007 the Pirelli RE Board of Directors defined general criteria for the maximum permitted number of appointments in other companies. In general, it was considered that the position of director or statutory auditor in more than 5 companies, other than Pirelli RE subsidiaries or associates or those under the direction and co-ordination of Pirelli RE, was incompatible with serving as a director of the Company when such companies:

are listed, including in the S&P/MIB (or even in equivalent foreign indexes);
operate predominantly in the financial sector with the general public (registered in the lists under art. 107 of Decree 385 dated September 1st, 1993), including asset management companies;
carry out banking or insurance activities.

The Board considered that the holding of more than 3 executive appointments in companies listed in (i), (ii) and (iii) was also incompatible with being one of the Company’s directors. Appointments held in several companies belonging to the same group are treated like a single appointment, with executive appointments prevailing over non-executive ones.

The Board nonetheless reserves the right to decide otherwise, with details provided in the annual corporate governance report; for this purpose, directorships or statutory auditorships may be counted in Italian or foreign companies, or those which do not have the above characteristics, on the basis of their size, organization and shareholding relationship between the different companies and the membership of directors on Board committees.

Based on the information provided by those concerned, all the directors currently in office have observed the criteria adopted.

5.2 Role of the board of directors

The Board of Directors plays a central, policy-making role in the Company’s management and so it carries out all the duties required of it by art. 1.1 of the Code.

In detail, the Board of Directors:

examines and approves the strategic, operational and financial plans of the Company and the Pirelli RE Group;
examines and approves the system of corporate governance of Pirelli RE, ensuring that all the necessary measures are adopted on a timely basis;
evaluates the adequacy of the general organizational, administrative and accounting structure of the Company and its strategically important subsidiaries, particularly with regard to the internal control system and the management of conflicts of interest. The latest presentation and review was carried out in the meeting of March 5th, 2009, which also updated the list of Group companies considered to be strategically important. These are in detail: (i) Pirelli RE SGR; (ii) Pirelli RE Property Management; (iii) Pirelli RE Agency, as well as the subsidiaries in Holland, Germany and Poland;
delegates and revokes powers to the Chief Executive Officers and to the Executive Investment Committee, specifying the limits and manner of their exercise, wording them in such a way that the Board does not remain divested of all its powers (this goal was achieved for the first time on April 14th, 2008 as soon as the current Board was appointed, with subsequent updates); the Board of Directors may also appoint one or more committees to provide advice and make proposals, also in order to make the corporate governance structure comply with the recommendations periodically issued by the competent authorities (art. 19 of the Articles of Association). In fact, the Board has appointed its members to an Executive Investment Committee, an Audit and Corporate Governance Committee and a Compensation Committee, the latter two with consultative and proposal-making functions, and all of which charged with the duties envisaged by the Code. It has been decided not to establish a Nominations Committee for reasons set out later;
within the limits envisaged by law, assumes decisions on mergers and spin-offs with reference to companies in which the Company owns at least 90% of the shares, reduction in share capital in the event of shareholder withdrawal, amendment of the Articles of Association to comply with applicable laws and regulations, move of the registered office within the borders of Italy, and the opening or closure of secondary offices;
determines, after examining the proposals of the Compensation Committee and consulting the Board of Statutory Auditors, the remuneration of the directors and of those directors who have been appointed to hold particular office and, where the Shareholders’ Meeting has not already done so, it allocates the Board’s overall remuneration to its individual members. This process was carried out on April 14th, 2008 as soon as the serving Board of Directors was appointed;
evaluates the Company’s general performance, paying particular attention to the information received from the Chief Executive Officers, and periodically comparing the results achieved with those forecast and announced to the market, particularly on the occasion of approving the quarterly financial reports;
examines and gives prior approval to transactions with a significant strategic impact or a significant impact on the Company’s operating performance, capital structure and financial position, with special reference to transactions involving related parties, except for those that are typical or usual and completed under standard terms.
General criteria have been established for identifying significant transactions with reference to the limits on authority vested in the Executive Investment Committee and in the Executive Deputy Chairman (limits for internal purposes). These limits have been duly defined with explicit reference to all those transactions that, regardless of criteria and upper limits on the authority granted, (i) have particular strategic importance, for example because they involve entering new markets or sectors of business; (ii) are not substantially consistent with the traditional business model adopted by the Group; (iii) are significantly atypical or unusual relative to the ordinary course of business;
evaluates, at least once a year, the size, composition and performance of the Board of Directors and its committees (Board Performance Evaluation).

The Board of Directors approved Pirelli RE’s method of Board Performance Evaluation for 2008 on November 5th, 2008. The related work was completed in February 2009, with the results presented to the Audit and Corporate Governance Committee and to the Board of Directors itself in its meeting of March 5th, 2009. The evaluation was carried out by independent professionals from Spencer Stuart and - in keeping with international best practice - mostly through direct interviews with the various directors, or, alternatively, by completing specific questionnaires. Comments were also obtained from the directors in support of their responses. The results of this evaluation, which confirmed the generally positive findings of the previous evaluation, will help refine the Board Performance Evaluation model still further and implement those changes making the operation of the Board even more effective.

More in detail, the evaluation revealed the following strong points:

the quality of the Board, viewed as being very professional and with a good mix of skills;
the rules of corporate governance, viewed as effective for ensuring correct business and corporate management;
the function of control, well exercised by the Board including through its committees, which make an effective contribution to its work;
the positive climate in Board meetings and the good attendance of directors at meetings, including through audioconferencing;
the desire of directors to examine and debate issues of group interest in detail and the, independent expression of opinions;
accurate minute-taking of Board meetings.

The areas for further improvement indicated by some directors relate to:

even more attention and time should be devoted to strategic business issues, especially in a period of great uncertainty and turmoil like recently;
in relation to the current situation, the possibility of earlier receipt of documentation on the matters for debate and of holding Board meetings more often and for longer, also to permit a more in-depth examination of the topics discussed;
the possibility of having access to greater knowledge about the Company’s business, organization and strategic position in a period of rapid and considerable change in the market and in view of the complexity of sector in which it operates, with the opportunity of holding ad hoc sessions for improving preparation and knowledge about more important company matters, particularly for the independent directors;
the opportunity of putting the latest areas identified for improvement into an action plan, in order to follow up their implementation more precisely and effectively.

In brief, the directors have displayed open and firm support for the Board Performance Evaluation process, revealing not only a very constructive approach but also their general approval and satisfaction with the Board’s operation, confirming that it is a process in evolution that can provide a valid contribution to additional, progressive improvement in the Board’s activities.

* * *

The Company’s Articles of Association (articles 14, 15, 16 and 17) contain rules on the functioning and conduct of Board meetings (4). While there is no specified minimum number of meetings, it is nonetheless standard practice to call the Board in compliance with Italian Stock Exchange provisions (5) at least 4 times a year for approving the periodic financial reports.

The notices calling Board meetings are sent in the form of a registered letter, telegram, fax, or e-mail to each director and standing statutory auditor at least 5 days in advance of the meeting (or, in urgent cases, at least 6 hours beforehand).

Board meetings can be held using telecommunication systems. In this case, such systems must allow all participants to (i) take part in the discussion and (ii) have access to the same information. The Board meeting is deemed to be held in the place where the Chairman and Secretary are simultaneously located. Board meetings are duly assembled if the majority of directors in office are present and the resolutions are passed with a majority of the votes cast. In the event of a tie, the Chairman has the casting vote.

The resolutions of the Board of Directors, even if adopted at meetings held by means of telecommunications systems, are transcribed in the specific minute book; the minutes for each meeting are signed by the meeting’s Chairman and its Secretary. The respective copies and excerpts that are not drafted by a notary public are certified as true by the Chairman.

Board meetings may be attended - upon invitation - by those company managers (usually General Managers and other managers) or third parties (usually the Company’s advisors) whose participation is necessary or advisable in relation to the matters being discussed, in order to provide the Board with the information or details required for the passing of the associated resolutions.

A total of 8 Board meetings were held in 2008, of which 6 by the currently serving Board appointed by the Shareholders’ Meeting on April 14th, 2008. The directors’ overall attendance record at meetings was 96.66% during the period January 1st - April 14th, 2008. The overall attendance record at meetings by the currently serving directors was 85.71%, while that of the independent directors was 69.44%. The meetings lasted an average of about an hour and a half each.

The Board has already met twice in 2009, with at least another 4 meetings scheduled.

* * *

With reference to directors being allowed to compete and considering that the last paragraph of art. 12 of the current Pirelli RE Articles of Association states that “unless resolved otherwise by the shareholders’ meeting, the directors are not bound by the prohibition envisaged in art. 2390 of the Italian Civil Code”, each director must inform the Board, upon accepting office, of any competitor activities with the Company and subsequently of any significant changes for consequent evaluation and action. All the directors have been sent a periodic notice making them aware of this issue. No such cases falling under this rule were reported in 2008.

5.3 Other executive bodies

Chief Executive Officers

In compliance with the provisions of the Code and in line with best practice, the Board of Directors has voted:

to grant Carlo Alessandro Puri Negri, the Executive Deputy Chairman (appointed to the new position on December 16th, 2008, with all his previously granted powers confirmed) with authority to sign on his own, all powers for the Company’s ordinary and extraordinary management except for (i) those matters than cannot be delegated under para. 4, art. 2381 of the Italian Civil Code and (ii) those specified in para. 2, art. 18 of the Articles of Association. He can grant special and general mandates relative to all these powers, vesting the proxyholder with individual or joint authority to sign on the Company’s behalf and with the authority that he considers to be in the Company’s best interests, including that of sub-delegation;
For internal purposes only, the Board of Directors has also set limits on the exercise of the powers granted, basically establishing (i) a limit of 50,000,000 euro on the commitment of company resources to investment activity; on borrowings in general; on loans and non-repayable contributions to associated companies; on capital increases by companies in which the Company has an equity interest and on the grant of secured guarantees (except against non-recourse loans) and unsecured guarantees to companies in which the Company has an equity interest or (ii) a limit of 10,000,000 euro on the grant of secured and unsecured guarantees to third parties;
to grant the Executive Deputy Chairman, charged with directing the business and identifying the most appropriate strategies for its consolidation and development, organizational responsibility for:
- management and development of the business;
- supervision of operating activities, including by co-ordinating directors with specific powers delegated from the Board and general managers in charge of the different sectors of the real estate business;
- determination, in agreement with the above persons, of the general strategies and policies for the development of the Company and the Group, as well as extraordinary transactions for submission to the Executive Investment Committee or the Board of Directors;
to grant Claudio De Conto, Managing Director Finance, responsibility - with all the related powers of an ordinary and extraordinary nature - for directing and supervising: (i) administration and control; (ii) acquisition of financial resources in support of and for developing the business; (iii) management and control of the Group’s financial position; (iv) investment of group financial resources in investee companies and funds; (v) conduct of capital operations involving the Company’s subsidiaries or associates. There is a limit of 30,000,000 euro per individual transaction for all of these powers;
to specify that the powers and activities delegated above do not refer to the authority delegated in respect of:
- occupational safety, accident prevention and occupational health, internal and external environmental protection, and the supervision of urbanization and building activities;
- handling of personal data (privacy protection),
which are exercised by the director charged with specific individual authority, without limits on amounts and under his own exclusive responsibility.

The structure of powers described above is designed to preserve the centrality of the Board’s role - in order to prevent it being deprived of its prerogatives - while aiming to implement a structure of authority responding to the Company’s business model that is capable of ensuring effective operation in a market where speed of action is essential for seizing the best business opportunities.

The director Emilio Biffi, as Chief Technical Officer, has also been granted a wide remit and associated spending powers in relation to occupational safety, accident prevention and health, internal and external environmental safeguards and the supervision of urbanization and building activities, as well as the handling of personal data (privacy protection).

Chairman

The Board of Directors appoints from among its members a Chairman, if the Shareholders’ Meeting has not done so, and possibly one or more Deputy Chairmen. If the Chairman is absent, the chairmanship is assumed, in order, by the Deputy Chairman & Chief Executive Officer, if appointed, by a Deputy Chairman or by a Chief Executive Officer; if there are two or more Deputy Chairmen or Chief Executive Officers, the meeting will be chaired by the person who is the oldest, respectively. The Board of Directors appoints a Secretary, who does not have to be a director.

In line with best practice adopted internationally and in the European Union, also reflected in the Code (art. 2.P.4), the current Chairman of the Board - Marco Tronchetti Provera - has not been granted any operational powers and so qualifies as a “non-executive director” within the meaning of art. 3 of the Code, but he is “not independent” because of his position as Chairman - with operational authority - of the ultimate parent company Pirelli & C. S.p.A..

Executive Investment Committee

The Executive Investment Committee held one meeting during 2008, lasting about an hour. As of March 5th, 2009, no meetings had yet been held in 2009.

Executive Investment Committee meetings are properly formed if attended by a majority of its members; resolutions are passed by absolute majority vote of those present. Executive Investment Committee resolutions are severally executed by the Chairman or the Executive Deputy Chairman, who are also authorized to delegate such power to special attorneys; its resolutions are then recorded in the minutes transcribed in the related book, signed by the Chairman and the Secretary; the Committee’s Secretary is the same as that of the Board of Directors, if appointed.

The current members of the Executive Investment Committee are:

Marco Tronchetti Provera (Chairman);
Carlo Alessandro Puri Negri;
Claudio De Conto;
Olivier De Poulpiquet de Brescanvel;
Claudio Recchi,

who have the following powers:

to purchase real estate or real estate portfolios, non performing loans and equity interests provided the overall financial commitment for each transaction does not exceed 150,000,000 euro;
to assume loans and financing from third parties; to grant loans to companies that are partly owned by the Company; to issue secured or unsecured guarantees to associated companies and/or third parties; all these powers have a limit of no more than 150,000,000 euro per transaction.

Reporting to the Board of Directors

In accordance with art. 18 of the Articles of Association (which implements the provision contained in para. 1, art. 150 of TUF), the Board of Directors and the Board of Statutory Auditors - except for cases when certain transactions or activities are submitted for the prior approval of the directors - are regularly informed or at least once every three months about the activities performed, the Company’s general operating performance, its business outlook, and the most significant transactions carried out by the Company or its subsidiaries with an effect on its operating performance, capital structure and financial position, and about any transactions that are atypical, unusual or with related parties or nonetheless representing a potential conflict of interest, with all the necessary details provided to understand such transactions.

For the purposes of fostering organized reporting, the Company has adopted a set of specific Guidelines (6) since 2002 which define the rules to be followed for complying with the quarterly reporting obligations under art. 150 of TUF relating to the activities of executive directors in exercising their delegated authority and executing transactions approved by the Board itself, and to their activities in general.

The Company constantly monitors the application of these Guidelines and has also revised them in order to make further improvements based on actual experience of applying them. This process ended with the approval of new Guidelines during the Board meeting of May 9th, 2007, as part of which stricter rules were adopted for transactions with related parties and real estate transactions in general by the Company’s relevant persons. These were further revised in the Board meeting of March 5th, 2009, with the aim of extending certain specific provisions and related safeguards to all employees with reference to transactions involving properties managed by the Group. The Guidelines are published in full in the Corporate Governance section of the Website.

5.4 Other executive directors

Art. 2.C.1 of the Code defines the circumstances under which a director must be classified as “executive”.

In view of this definition, the Board considers that 6 out of its 15 members are executive, namely Carlo Alessandro Puri Negri (Executive Deputy Chairman), Claudio De Conto (Managing Director Finance) and the directors Emilio Biffi (Chief Technical Officer), Olivier De Poulpiquet (Chief Investment & Fund Raising Officer), Paolo Massimiliano Bottelli (who in addition to his position as General Manager also holds positions - currently being vacated - in Pirelli RE’s strategically important service sector subsidiaries) and Wolfgang Weinschrod (who holds positions in strategically important subsidiaries in Germany).

As a result of the provisions of art. 2.C.2. of the Code and also the findings of the Board Performance Evaluation process, the idea of holding specific meetings with the management of Pirelli RE Group is being examined in order to create opportunities - outside the formal Board meetings - to provide the directors, particularly the non-executive ones, with a better knowledge of the Company and its business.

5.5 Independent directors

Art. 3.C.1 of the Code defines the circumstances under which a director may qualify as “independent”.

In view of this definition, the Board is of the opinion that 7 of the remaining 9 non-executive directors (Reginald Bartholomew, William Dale Crist, Carlo Emilio Croce, David Brush, Valter Lazzari, Claudio Recchi and Dario Trevisan) qualify as independent directors.

Furthermore, on March 5th, 2009, the Board checked that the above independent directors satisfied the independence qualifications contained in the Code, like at the time of their appointment, as well as the extra independence requirements contained in para. 4, art. 147-ter of TUF.

With regard to this process, (i) the review was carried out on the basis of information known to the Board and the specific written declarations made by the persons concerned and (ii) the Board of Statutory Auditors - duly aware of its related duty now contained in art. 3.C.5 of the Code – has checked the correct application of the assessment criteria and procedures adopted by the Board of Directors for evaluating the independence of its members and provided a specific report in the same Board meeting.

The number and authority of the independent directors are viewed as being adequate in relation to the size of the Board of Directors and the Company’s business and such as to allow the establishment of committees within the Board, in accordance with the Code’s guidelines. In fact, both the Audit and Corporate Governance Committee and Compensation Committee are entirely made up of independent directors. There are no specific rules for determining the adequacy of the ratio of executive to non-executive and independent directors, and so reference has also been made to the criteria laid down for the Italian stockmarket’s STAR segment, which consider 4 “non executive and independent directors” to be a sufficient number for Boards with more than 14 members.

5.6 Lead independent director

For the purposes of enhancing the role of the independent directors - and anticipating the recommendation now contained in art. 2.C.3 of the Code in relation to the role of the Board’s Chairman in the Company’s parent - the Board of Directors has decided since March 9th, 2006 to introduce the role of Lead Independent Director. This person - identified as Dario Trevisan, Chairman of the Audit and Corporate Governance Committee - acts as a point of reference and co-ordination for the work and contributions of the independent directors. The Lead Independent Director may also call - at his own initiative or at the request of other directors - special meetings for just the independent directors (“independent directors’ executive sessions”) to discuss issues considered of interest in relation to the operation of the Board or management of the business.

Two meetings of the independent directors were held during 2008, on July 4th, 2008 and October 15th, 2008 respectively. At the meeting of July 4th, 2008, the independent directors discussed the conclusions of the independent expert in his fairness opinion on a property development transaction involving related parties. At the meeting of October 15th, 2008, the independent directors discussed the responses to questions addressed to the Company by CONSOB - like to all other real estate companies and others in various sectors - taking account of the particular context of the financial markets.

6. TREATMENT OF CORPORATE INFORMATION

As for the management of confidential information, particularly “price sensitive” information, this is the direct responsibility of the Executive Deputy Chairman with the assistance of the relevant company departments.

Documents and information regarding the Company and its subsidiaries are published - always with the consent of the Executive Deputy Chairman - by the Board Secretary’s office and the Legal and Corporate Affairs Department where notices to the authorities and shareholders are concerned, while press releases are handled by the Press Office and communications addressed to institutional investors and financial analysts by the Investor Relations Office. The Executive Deputy Chairman and the heads of the departments described above are always ready to respond to any urgent external communication needs.

For external communication of documents and information, constant reference is made to the corporate reporting principles contained in the “Guide to the Disclosure of Information to the Market”, written by Forum ref. (as amended for the changes in the related statutory and regulatory provisions (7)). Press releases are prepared in accordance with the Italian Stock Exchange’s recommendations setting out guidelines on the structure and minimum content of such statements.

Bearing in mind the provisions resulting from Italy’s adoption of EC directives on market abuse, the Board has adopted a special set of “Guidelines for handling and publishing price sensitive information” (which can be found on the Website). This procedure formalizes and explains the correct processes and flows for handling price sensitive information, assigning consequent duties and responsibilities in the different circumstances, in order to ensure full compliance in this area, also taking account of the large number of people who might be involved or who nonetheless come into contact with price sensitive information. In fact, in accordance with art. 115-bis of TUF, the guidelines provide for the creation of a special “List of persons with access to price sensitive information”, and establish how it should be maintained, managed and searched using computerized systems.

With specific reference to the laws on internal dealing, the Company has:

identified the additional relevant persons bound by the disclosure obligations (in addition to directors, statutory auditors and general managers) as direct reports of the Executive Deputy Chairman;
introduced, despite the absence of legal or regulatory obligations, the duty to refrain from dealing in the Company’s shares or associated financial instruments in specific periods of the year (known as “black-out periods”). These black-out periods are defined as the twenty days preceding approval of the periodic financial results;
sent a specific notice to the aforementioned “relevant persons” bound by the disclosure obligations for the purposes of providing them with all the information needed to comply with these obligations, also by preparing a specific “Memorandum on Internal Dealing”;
identified the Legal and Corporate Affairs Department as the point of reference for relevant persons for every need in this area and as the recipient of the related dealing notices for subsequent disclosure to the market.

7. BOARD COMMITTEES

In accordance with the Code (articles 7 and 8) and the provision contained in art. 19 of the Articles of Association, the Company has established as offshoots of the Board of Directors:

a Compensation Committee; and
an Audit and Corporate Governance Committee,

with the function of providing advice and making proposals and whose operations comply with those envisaged by the Code.

Specific rules of procedure have been drawn up for both Committees, and are similar to those for the Board of Directors, specifically with regard to the method of calling, the information on topics to be discussed, their proceedings (formation, resolutions and related minutes) and the participation of third parties. In addition, these Committees must always brief the Board of Directors at its earliest meeting after that of any committee meeting. The resolutions of these committees, even if adopted at meetings held by means of telecommunications systems, are transcribed in a specific minute book; the minutes for each meeting are signed by the meeting’s Chairman and its Secretary.

⁽¹⁾ In accordance with the Articles of Association (art. 12) the Company is managed by a Board of Directors consisting of between 5 and 19 members who remain in office for three financial years (unless a shorter period is established by the Shareholders’ Meeting at the time of their appointment) and may be re-elected. The Shareholders’ Meeting determines the number of Board members, which remains fixed until resolved otherwise.

⁽²⁾ See art. 18 of the Articles of Association for the powers attributed to the Board of Directors.

⁽³⁾ See art. 22 of the Articles of Association. In compliance with the provisions of law, the Shareholders’ Meeting voted to update the Articles of Association to adopt this requirement, already applied when appointing the Board of Statutory Auditors at the Shareholders’ Meeting of April 20th, 2007.

⁽⁴⁾ The Chairman calls the Board and moderates its meetings, ensuring that the directors receive in due advance - where possible and reasons of urgency do not exist - the documentation and information needed so as to allow them to express their opinion on the topics on the agenda in an informed fashion; the Chairman must, including with the assistance of qualified in-house resources, inform directors and, if appropriate, discuss the principal legislative and regulatory changes affecting the Company and its corporate bodies. The Board of Directors is called by the Chairman or his substitute at the registered office or at another place to be specified in the notice of call (provided that it is in Italy or in a country belonging to the European Union), whenever he deems it to be in the Company’s interest, or when written request for such is made by one of the Chief Executive Officers or by one-fifth of the directors in office or by at least two standing statutory auditors. Nevertheless, the Board of Directors may pass valid resolutions, even if not formally called, when all its members and all the standing statutory auditors are present.

⁽⁵⁾ See subpara. c), para. 1, art. 2.6.2 of the Stockmarket Regulations.

⁽⁶⁾ These Guidelines were first amended on July 28th, 2004, requiring, amongst others, related parties to notify the Company of any companies to be treated as indirectly related parties through themselves (insofar as controlled by or nonetheless traceable to such related parties), in order to create (and keep constantly updated) a database allowing the Company to check such transactions directly.

⁽⁷⁾ See, in particular, CONSOB Circular 6027054 dated March 28th, 2006.

Pirelli RE

Annual financial report 2008