Operating risks

Environmental risks

The activities and products of the Pirelli Group are subject to numerous environmental laws that vary from country to country. These are related by the tendency to evolve towards increasingly restrictive measures, partly in consequence of the growing commitment by the international community to environmental sustainability. Pirelli expects that stricter laws will be gradually introduced, regulating the various types of environmental impact that businesses might have (air pollution, waste output, soil contamination, water use, etc.). Consequently, the Pirelli Group expects that it will have to continue to invest and/or incur costs for what might become significant amounts. Reference is made to the Sustainability Report chapter “Environmental Dimension” for details on the process of managing and controlling environmental risks described above.

Employee health and safety risks

As part of operating its business, the Pirelli Group bears liabilities and costs for the measures necessary to guarantee full compliance with its obligations under workplace health and safety protection laws. Specifically in Italy, the occupational health and safety law (Legislative Decree 81/08), as amended (Legislative Decree 106/09) introduced new obligations that have impacted the management of activities at Pirelli sites and the models used to allocate liability. Failure to comply with applicable laws and regulations results in the imposition of criminal and/or civil penalties on the persons responsible and, in certain cases where health and safety laws are violated, on the firms themselves, in accordance with a European standard of objective business liability that has also been received in Italian law (Legislative Decree 231/01). Reference is made to the Sustainability Report for details on the process of managing and controlling these risks.

Product defect risk

Like all other producers of goods for sale to the public, Pirelli might be affected by product liability suits or by product recalls due to presumed defects in sold materials. Although no major events of this sort have occurred in recent years and notwithstanding insurance coverage against these risks, the Pirelli brand might be negatively impacted should they ever occur. For this reason, the tyres made by Pirelli are subjected to intensive quality tests before being released for sale, and the entire production process is subject to specific quality assurance procedures with constantly rising thresholds for safety and performance.

Litigation risks

In the course of operating its business, Pirelli might be involved in legal actions, tax litigation, commercial lawsuits or labour lawsuits. The Group adopts the measures necessary to prevent and attenuate any penalties that might result from these proceedings.

Risks associated with human resources

The Group is exposed to the loss of human resources holding key positions or possessing critical know-how. To face this risk, Pirelli has adopted compensation policies that are periodically revised according to changes in general macroeconomic conditions as well as on the basis of pay benchmarks. Moreover, long-term incentive plans and specific not-to-compete clauses (also aimed at retention) are also envisaged. Finally, specific management policies are adopted to motivate and keep talented employees.

Business interruption risks

The global scale of Group operations exposes it to a plethora of risks that might cause an interruption in business activities for an indefinite period of time, consequently impacting its operating capacity and financial results. Risks associated with natural or accidental events (fire, flood, earthquake, etc.), malicious acts (vandalism, sabotage, etc.), malfunctions in auxiliary plants or interruption of utilities may cause serious property damage and production losses, with a particular impact on production sites that have high volumes or specific (high-end) products. During 2013 the vulnerability of all Group facilities to catastrophic natural events (particularly flooding, hurricane and earthquakes) was analysed, with an estimate of the contingent damage (give the probability of occurrence). The analyses that were performed confirmed that business interruption risks are adequately covered, through a detailed series of safety measures, damage prevention systems and mitigation of possible impact on business, inter alia on the basis of current business continuation plans and existing insurance policies covering property damage and business interruption. In regard to earthquake risk, and specifically at the plant located in Turkey, particularly large seismic events might cause losses exceeding the insurance coverage limits, with a consequent negative impact on operating results.

In 2012 the scope of analysis of business interruption risks was extended to the Pirelli supply chain, particularly in regard to Tier-1 suppliers. The analysis led the Group to undertake a series of mitigation actions to reduce the vulnerability of the supply chain. In particular, this involved extending the portfolio of approved plants by individual supplier, approval of alternative materials/ suppliers, increase in the levels of safety stocks of critical materials, supplier audits, etc.

A joint effort was launched in 2013 with certain of the Group's principal suppliers to agree on areas for improvement of the principal business interruption risks at their production sites, including the sharing of Pirelli best practices applicable to loss prevention.

Risks associated with information systems and network infrastructure

Group operating activities rely increasingly on the proper, uninterrupted functioning of information systems and network infrastructure in support of business processes.

Human error, access by unauthorised personnel, vulnerable security systems, and/or system and network infrastructure breakdowns or malfunctions might negatively impact the performance of operating activities, cause the disclosure of critical, confidential corporate information, with consequent repercussions on the Group’s corporate image and/or the risk of statutory and regulatory violations.

The Group has finished mapping the principal risks connected with the 10 most important information systems supporting core processes (production, purchasing, sales, and logistics). The risk was analysed on the basis of its impact on the Group if confidentiality were breached and according to the likelihood that the event occur in connection with the vulnerabilities existing in the system. Specific measures for the principal vulnerabilities were implemented for additional reinforcement of safety measures (physical, logic and infrastructure).