TDE.L Regulatory News (TDE)

10 Apr 2007 08:16

Telefonica SA03 April 2007 PART 2 D RISK CONTROL SYSTEMS D.1. Give a general description of risk policy in the Company and/or its group, detailing and evaluating the risks hedged by the system, as well as an explanation of how far these systems match the profile of each type of risk. Telefonica continually monitors the most significant risks in the main companies comprising its Group. To do so, the Company Model is applied regularly and equally in all the Group companies, which provides an evaluation of the importance of each of the risks that may affect the companies, as well as the degree of control over the same. This procedure is based on the system proposed by the COSO Reports (Committee of Sponsoring Organizations of the Treadway Commission), in which an integrated framework of Internal Control and Risk Management is established. Thus, the Group has a map that identifies the risks that require specific control and monitoring according to their importance. Likewise, the model matrix includes the operational processes in which each of the risks considered are managed, in order to evaluate the control systems established and to be reasonably sure that these risks will not arise. In this respect, it should be noted that the Company has undertaken the work necessary to modify the risk measurement parameters, moving from the current parameters (grade of importance and level of control) to impact and probability of occurrence, in line with best international practices, evolving from the current COSO I Model to the COSO II Model. Identification of these risks and processes is undertaken by the Directorate General of Internal Auditing, which is responsible for internal Group audits, who regularly informs the Audit and Control Committee of Telefonica of the results of its work. The 50 risks considered by the current model applicable to the Group are classified in the following categories: I.- RISKS RELATED TO BUSINESS PROCESSES: - Operational risks (risks that could affect the effectiveness and efficiency of operational processes and the provision of services, customer satisfaction and the reputation of Group companies). - Integrity risks (risks linked to internal and external fraud that the Group companies may have). - Management and human resources risks (management, administration and leadership, limits on authority, etc). - Technological risks (including verification of security of information systems - access, data protection, etc., contingency plans, automation of activities, etc. - Financial risks (highly competitive markets, strictly regulated markets, services provided under licences or concessions, country risks associated with investment in Latin America, management of exchange rate and/or interest rate risks, risks associated with relations with Group members, risks associated with business takeovers and mergers, etc. II.- INFORMATION RISKS: - Operating information. - Financial information. - Strategic evaluation. III.- RISKS RELATED TO THE ENVIRONMENT: - Competition. - Relations with shareholders. - Availability of resources. - Political, economic, legal and tax environment. - Regulation and changes in the industry. D.2. Indicate the control systems to assess, mitigate and reduce the main risks of the Company and its group. 1.- As mentioned above, the internal control framework adopted by the Telefonica Group is based on the COSO model, widely recognised in international financial circles, the objectives of which are: * The efficiency and effectiveness of Company operations. * Protection of its assets. * The reliability of financial information. * Compliance with legislation and regulations. 2.- In addition to the controls established in each of the Company's operational processes, the Group also has the following specific elements of control: * An internal audit structure that encompasses the entire Telefonica Group in keeping with the criteria and professional rules set out by the International Institute of Internal Auditors. It should be noted that Telefonica was the first Spanish company to obtain the quality certification from this body. * The Consolidated Annual Accounts of the Company and the individual Annual Accounts of all the companies with significant importance are subject to external audits. Likewise, the External Accounts Auditor is entrusted with the task of making recommendations regarding internal controls in the more important Group companies. 3.- Furthermore, to establish appropriate and consistent control systems, the Telefonica Group has a set of regulations governing basic control issues. The main ones are: (i) Regulations governing control of the process of drawing up financial/ accounting information. This process is governed by the following manuals, instructions and regulations: - Manual of Accounting Evaluation and Policies. - Instructions for closure and external auditing. - Annual calendar of financial/accounting information. - Corporate Accounts Plan. - Manual of the information system to branches (technical/IT instrument for the reporting of financial/accounts information and for the consolidation of financial statements). - Regulations regarding intra-group and internal control operations. (ii) Regulations governing control of Company information and its financial/ accounting information system: - Registration, communication and control of financial/accounting information. - Regulations governing disclosure to the markets. - Rules of conduct for financial personnel. - Intra-group transactions. (iii) Regulations regarding external representation and the relationship between companies: - Powers of attorney: faculties of representation of the Company, to sign contracts, open accounts, dispose of funds, etc. - Centralised decision-making on Group transactions. - Payments: segregation of functions, joint signature of two people, bank reconciliations, etc. - Purchase of goods and services: budgetary reserve, corporate procedure for awards, formalisation of commitments, payment terms, etc. (iv) Regulations governing environmental minimums: - Standards to be complied with in the Group when the law does not set a higher requirement. 4.- In addition, the Group also has an Intervention Unit to control and monitor the use of funds. Its duties include controlling the use of funds, relevant transactions and operations, travel and hospitality expenses, implementation of basic controls in the processes of greatest risk, etc. 5.- The Telefonica group also has Units responsible for controlling specific risks. Specifically, these Units deal with risks concerning Risks and Insurance, Reputation, Regulation, Quality and Human Resources (labour risks). 6.- In addition, due to its condition as a Company floated on the New York stock market, Telefonica must comply with the requirements laid down in the SarbanesOxley Law and its development regulations. In particular, the revision carried out of the effectiveness of internal controls for the financial report both in the process of drawing up account balances and in the main processes that send information to the accounting systems, should be highlighted. This practice is, as we have said, obligatory for Telefonica S.A. and for other companies in the Group due to its nature as "SEC registrant". 7.- In addition, it should be noted that a channel for complaints has been in place since 2005, created by the Audit and Control Committee of the Board of Directors to allow any employee to file complaints, on an entirely anonymous basis, regarding the internal control of financial statements, accounting records or audits. 8.- Lastly, in 2006 the Company's Board of Directors approved the unification of the Ethical Codes of the different Group companies within a new Code of Conduct to be applied uniformly in all of the countries in which the Telefonica Group operations and to all of the Group's employees. Of note within the new text is the creation of an "Code of Conduct Office", which is intended as a mechanism for the implementation and observation of the Code, with the aim of publicising, boosting and ensuring compliance with these principles. The Code of Conduct establishes the creation of a confidential channel for asking questions, seeking advice and raising issues associated with the fulfilment of the associated principles and policies, particularly in those cases where there may be failure to comply with the code. D.3. If any of the risks facing the Group and/or its companies have materialised, indicate the circumstances and whether the established control systems worked adequately. The Telefonica Group has not detected any situations that could lead it to conclude that the basic objectives that define the internal control model have not been reasonably protected. The internal control model used by Telefonica and its Group is subjected to continual monitoring such that when a risk appears or a control deficiency is found in any process that increases exposure above a reasonable level, the relevant action plans are drawn up incorporating the necessary improvements. The most important aspects of the action plans undertaken are reported to and monitored by the Audit and Control Committee until they are fully implemented. D.4. Indicate whether there is a committee or other governing body in charge of establishing and supervising these control systems and explain its duties. The Board of Directors of Telefonica S.A. has constituted an Audit and Control Committee whose duties, competencies and rules of operation are set out in the Articles of Association and in the Regulations of the Board of Directors. Such regulations comply with all legal requirements as well as with the recommendations for good corporate governance issued by both national and international bodies. Except in the case of specific themes, the External Auditor and representatives of the Directorates General of Finances, Internal Auditing and Strategy, Budgeting and Control are invited to attend the meetings of the Committee. Occasionally, as previously mentioned above, other managers from within the Group are invited to inform the Committee on specific areas of interest to it. The functions of the Committee are established in the Articles of Association of Telefonica S.A. (art. 31 bis), in the Regulations of the Board of Directors (art. 24) and in section B.2.3 of this report. In addition, the Company has designed a system of information to which the Chairman and the members of the Audit and Control Committee have access, through which they can obtain, if they wish, information on the conclusions of internal auditing reports and on the fulfilment of recommendations subject to specific monitoring. In addition to this, within the Group, Committees have been set up in those companies with shares on the stock market, with similar functions to those described for the Audit and Control Committee of Telefonica S.A. D.5. Identify and describe the processes for compliance with the regulations applicable to the Company and/or its groups. The great majority of the companies comprising the Telefonica Group operate in the telecommunications sector, which is subject to regulation in nearly all the countries where the Group is present. Amongst the basic objectives of the internal control model described above is objectives compliance with those laws and regulations that affect the Telefonica Group's activities. In particular, the Group has units exercising specific control over this type of risks, especially through its legal services and in the area of corporate regulation. E THE GENERAL SHAREHOLDERS' MEETING E.1. Indicate the quorum required for constitution of the General Shareholders' Meeting established in the company Articles of Association. Describe any difference from the minimum regime set out in the Corporations Law. Pursuant to Article 15.4 of the Articles of Association, both ordinary and extraordinary General Shareholders' Meetings shall be validly constituted in accordance with the requirements of the legislation in effect in each case, depending on the matters on the Agenda. E.2. Explain the rules governing the adoption of corporate resolutions. Describe any differences from the provisions established in the Corporations Law. Article 21 of the Articles of Association established that the General Shareholders' Meeting shall adopt its resolutions with the majority of votes established by law, cast by the shareholders present or represented. Each share present or represented at the General Shareholders' Meeting shall give rise to one vote, except shares without voting rights, pursuant to the provisions of the law. Notwithstanding the provisions of the paragraph above, no shareholder shall be allowed to cast a number of votes representing more than ten percent of the overall share capital with voting rights existing at any given time, regardless of the number of shares he/she actually holds. In ascertaining the maximum number of votes that each shareholder may cast, only those shares owned by each shareholder shall be taken into account, and the shares belonging to other shareholders who have appointed such shareholder as their proxy shall not be included, without prejudice to the aforementioned ten percent limit, which shall apply equally to every represented shareholder. The limit set in the preceding paragraphs shall also apply to the maximum number of votes that may be cast, jointly or individually, by two or more corporate bodies holding shares that belong to the same group of entities, and to the maximum number of votes that may be cast by an individual or corporate body holding shares in the Company or by the organisation or organisations, also holding shares, that are directly or indirectly controlled by such individual or corporate body. To the effects of the paragraph above, both the existence of groups of organisations and the controlling situations described above shall be ascertained in accordance with the provisions of section 4 of the Securities Market Law of 28th July 1998. Without prejudice to such restrictions on the voting rights as set out above, all the shares represented at the General Shareholders' Meeting shall be taken into account in the determination of the required quorum to validly hold the Meeting; however, in the casting of votes, those shares shall be subject to the ten percent limit on the number of votes that may be cast, in accordance with the provisions of the present article 21. E.3. List all shareholders' rights regarding the General Shareholders' Meetings other than those established under the Corporations Law. Telefonica grants all shareholders the rights related to the General Shareholders' Meetings set out in the Corporations Law. Likewise, with a view to encouraging shareholders' participation in the GSM, pursuant to Article 11 of the Regulations of Telefonica's General Shareholders' Meeting, shareholders may, at all times and following accreditation of their identity as such, make suggestions related to the organisation, operation and competencies of the General Shareholders' Meeting through the Shareholders' Office. E.4. Indicate measures adopted, if any, to encourage shareholder participation in the General Shareholders' Meetings. The primary goal of the Regulations of the General Shareholders' Meeting of Telefonica is to offer the shareholder a framework that guarantees and facilitates the exercise of his/her rights in relation to the sovereign Company body, with particular attention to the right to information and participation in the deliberations and voting, endeavouring to achieve maximum diffusion of the call and proposed resolutions to be submitted to the GSM. In addition to the measures required by the applicable law in effect, the following are specific measures for in the Regulation of the General Shareholders' Meeting with a view facilitating shareholders' attendance and participation in the Meeting: * WEBSITE Incorporation into the Company website, from the date of publication of the announcement of the notice of meeting and in addition to the documents and information required by law, of all the information that the company deems appropriate with regard to the aforementioned objectives and in particular, as an indication, the a) The text of all the proposed resolutions to be submitted to the General Shareholders' Meeting that have been approved by the Board of Directors, without prejudice to their subsequent modification by the Board prior to the date of the Meeting, when legally possible. b) Information regarding the venue of the General Shareholders' Meeting and describing, if appropriate, the process for access to the hall. c) Procedure for obtaining attendance cards or certificate issued by the legally authorised bodies. d) Means and procedures to grant proxy for the General Shareholders' Meeting. e) The means and procedures for remote voting should they exist. f) All other issues of interest to follow the meeting, such as the existence of media for simultaneous interpreting of the meeting, audiovisual diffusion of the Meeting or information in other languages. The Company shareholders may obtain all the aforementioned information through the corporate website, or may request that it be sent to them free of charge through the mechanisms established on the website for this purpose. * FORMULATION OF SHAREHOLDERS'SUGGESTIONS As indicated above and without prejudice to the rights of shareholders to request inclusion of certain matters on the Agenda of the Meeting when requesting its call in the cases and terms envisaged by law, shareholders may, at all times and with prior accreditation, make suggestions regarding the organisation, operation and competencies of the General Shareholders' Meeting through the Shareholders' Office. Likewise, through the Shareholders' Office, shareholders may request all types of information, documentation and clarifications required in relation to the GSM, either through the Company website or by calling the toll-free line. * DELEGATION AND REPRESENTATION The Chairman of the General Shareholders' Meeting or, when so delegated by the Chairman, the Secretary, shall resolve all doubts that may arise with respect to the validity and effectiveness of the documents accrediting the right of any shareholder to attend the GSM individually or in representation of another, as well as to the delegation and proxy in favour of another party, endeavouring to consider invalid or ineffective only those documents that lack the minimum requirements, provided that such defects have not been remedied. E.5. Indicate whether the General Shareholders' Meeting is presided by the Chairman of the Board. List the measures, if any, adopted to guarantee the independence and correct operation of the GSM: +----+------+ |YES | NO | +----+------+ | X | | +----+------+ +------------------------------------------------------------------+ | Describe the measures | +------------------------------------------------------------------+ |The General Shareholders' Meeting of Telefonica S.A. has | |established its principles of organisation and operation in a set | |of Regulations, approved by the GSM, and the Chairman must always | |act in line with the principles, criteria and guidelines set out | |therein. | | | |In addition to establishing the principles of organisation and | |operation of the General Shareholders' Meeting, gathering and | |organising the different aspects of calling, organisation and | |development of the GSM in a single text, the document provides | |mechanisms to: | | | |- facilitate shareholders' exercise of their relevant rights, | |with particular attention to the shareholders' right to | |information and to participate in the deliberations and voting, | | | |- ensure maximum transparency and efficiency in forming the will | |and decision-making by the GSM, ensuring the maximum possible | |dissemination of the call and of the proposed motions. | | | |Furthermore, in accordance with the Regulations of the Board of | |Directors, the conduct of the Chairman of the Board must always be| |in line with the criteria and guidelines determined by the GSM (in| |addition to the Board of Directors and the Board Committees). | +------------------------------------------------------------------+ E.6. Indicate the amendments, if any, made to the Regulations of the General Shareholders' Meeting during the year. The Regulations of the General Shareholders' Meeting of Telefonica were approved by the Ordinary GSM of the Company held on April 30th 2004, and have not been amended since then. E.7. Indicate the attendance figures for the General Shareholders' Meeting held during this year: Attendance figures +-----------+------------+-----------+------------+-----------+ | Date GSM |% attending |% by proxy | remote | Total % | | | in person | | voting | | +-----------+------------+-----------+------------+-----------+ |21-06-2006 | 0.086 | 52.365 | 0.000 | 52.451 | +-----------+------------+-----------+------------+-----------+ E.8. Briefly describe the resolutions adopted at the General Shareholders' Meeting held during the year and the percentage by which each resolution was passed. GENERAL SHAREHOLDERS' MEETING - JUNE 21st 2006 I. Approval of the Annual Accounts for financial year 2005. - Votes in favour: 2,513,791,007 (97.38%) - Votes against: 329,455 (0.012%) - Abstentions: 67,070,666 (2.59%) - Result: Approved II. Merger of Telefonica, S.A. and Telefonica Moviles, S.A. - Votes in favour: 2,570,280,957 (99.57%) - Votes against: 755,350 (0.029%) - Abstentions: 10,154,821 (0.39%) - Result: Approved III.1 Re-election of Mr. D. Carlos Colomer Casellas. - Votes in favour: 2,557,398,872 (99.07%) - Votes against: 4,288,597 (0.16%) - Abstentions: 19,503,659 (0.75%) - Result: Approved III.2 Re-election of Mr. Isidro Faine Casas. - Votes in favour: 2,545,271,614 (98.60%) - Votes against: 16,222,997 (0.62%) - Abstentions: 19,696,517 (0.76%) - Result: Approved III.3 Re-election of Mr. Alfonso Ferrari Herrero. - Votes in favour: 2,560,670,764 (99.20%) - Votes against: 4,321,019 (0.16%) - Abstentions: 16,199,345 (0.62%) - Result: Approved III.4 Re-election of Mr. Luis Lada Diaz. - Votes in favour: 2,546,433,539 (98.65%) - Votes against: 15,082,114 (0.58%) - Abstentions: 19,675,475 (0.76%) - Result: Approved III.5 Re-election of Mr. Antonio Massanell Lavilla. - Votes in favour: 2,536,607,244 (98.27%) - Votes against: 24,403,932 (0.94%) - Abstentions: 20,179,952 (0.78%) - Result: Approved III.6 Ratification of the appointment of Mr. David Arculus. - Votes in favour: 2,556,269,400 (99.03%) - Votes against: 8,719,695 (0.33%) - Abstentions: 16,202,033 (0.62%) - Result: Approved III.7 Ratification of the appointment of Mr. Peter Erskine. - Votes in favour: 2,548,714,423 (98.74%) - Votes against: 16,106,504 (0.62%) - Abstentions: 16,370,201 (0.63%) - Result: Approved III.8 Ratification of the appointment of Mr. Julio Linares Lopez. - Votes in favour: 2,549,703,218 (98.78%) - Votes against: 15,082,114 (0.58%) - Abstentions: 16,405,796 (0.63%) - Result: Approved III.9 Ratification of the appointment of Mr. Vitalino Manuel Nafria Aznar. - Votes in favour: 2,547,742,403 (98.70%) - Votes against: 16,599,613 (0.64%) - Abstentions: 16,849,112 (0.65%) - Result: Approved IV. Authorisation of long-term incentive plan. - Votes in favour: 2,553,382,923 (98.92%) - Votes against: 17,936,339 (0.69%) - Abstentions: 9,871,866 (0.38%) - Result: Approved V. Authorisation for the acquisition of treasury stock, either directly or through Group companies. - Votes in favour: 2,572,878,997 (99.67%) - Votes against: 1,010,147 (0.03%) - Abstentions: 7,301,984 (0.28%) - Result: Approved VI. Authorisation for the Board to increase share capital under the terms and conditions laid down in article 153.1.b) of the Corporations Law. - Votes in favour: 2,338,826,746 (90.61%) - Votes against: 230,295,020 (8.92%) - Abstentions: 12,069,362 (0.46%) - Result: Approved VII. Delegation of faculties for the formalisation, interpretation, rectification and execution of resolutions adopted by the GSM. - Votes in favour: 2,570,674,474 (99.59%) - Votes against: 329,794 (0.01%) - Abstentions: 10,186,860 (0.39%) - Result: Approved E.9. Indicate, if appropriate, the number of shares required to attend the General Shareholders' Meeting and whether the Company Articles of Association establish any restrictions in this regard. As established in Article 17 of the Company Articles of Association, every shareholder who holds at least a number of shares representing a par value of not less than 300 euros shall be entitled to attend the General Shareholders' Meeting, provided that said shares have been entered in the shareholder's name in the relevant registry of account entries no less than five days prior to the date on which the GSM is scheduled to be held, and that each shareholder documents such circumstance by means of the corresponding attendance card or certificate issued by any of the Depositories participating in the Registry Systems Management Company that are members of the Securities Clearing and Settlement Service, or by any other means envisaged under the legal provisions in effect. Notwithstanding the above, shareholders who have a lesser number of shares shall be allowed at all times to delegate the representation thereof upon a shareholder with the right to attend the GSM, as well as to join with other shareholders in similar situation in order to reach the required number of shares, conferring their representation on only one of the aforementioned group of shareholders. Such representation shall be drawn up especially for each Meeting and shall be documented in written form. All shareholders entitled to attend shall be allowed to delegate their representation at the GSM upon another person, who need not be a shareholder. Such proxy shall be granted on such terms and conditions as may be required by law. E.10. Indicate and explain the policies pursued by the company with reference to proxy voting at the General Shareholders' Meeting. As indicated above, with a view to facilitating shareholders' attendance and participation in the General Shareholders' Meetings, the Company has established the following policies in keeping with the legislation in effect: *Voting by proxy at the GSM: - All shareholders entitled to attend shall be allowed to delegate their representation at the General Shareholders' Meeting upon another person, who need not be a shareholder. Such representation shall be granted specially for each Meeting, either through the proxy form printed on the attendance card or through any other means envisaged by law. - Likewise, shareholders who hold less than the minimum number of shares required to attend the General Shareholders' Meeting (300 shares) shall be allowed at any time to delegate the representation thereof upon a shareholder with the right to attend the General Shareholders' Meeting, as well as to join with other shareholders in similar situation in order to reach the required number of shares, conferring their representation on only one of the aforementioned group of shareholders. * Voting instructions: - The documents recording delegation or representation of vote shall state voting instructions. Should express instructions not be given, it shall be understood that the representative shall vote in favour of the proposed resolutions put forward by the Board of Directors on the matters included on the Agenda for the Meeting. - Should there be no instructions because the General Shareholders' Meeting is to resolve on matters that, while not on the Agenda for the Meeting and thus, unknown at the date of the delegation, may be submitted to ballot at the GSM, the representative must cast the vote in the manner he/she deems the most appropriate, taking into account the interest of the Company and the party represented. The same shall apply when the relevant proposal or proposals submitted for decision by the Meeting are not formulated by the Board of Directors. \* The party acting as representative: - If the proxy document does not state the specific person or persons to whom the shareholders grants representation, it shall be understood to be granted in favour of the Chairman of the Board of Directors of the Company, or whosoever may be a stand in for the Chairman to preside the Meeting, or in favour of the person appointed by the Board of Directors and notified in advance in the official announcement of the call for the GSM. - In cases in which a public request for representation is formulated, the restrictions on the exercise of voting rights set out in Article 114 of the Securities Market Law shall apply to the Director obtaining such representation. Finally, and with a view to facilitating the maximum participation of shareholders, the Regulations of the General Shareholder's Meeting establishes that the Chairman of the Meeting, or when so delegated by the Chairman, the Secretary of the same, shall resolve all doubts arising concerning the validity and effectiveness of the documents accrediting the delegation or representation in favour of another party, endeavouring to consider as invalid or ineffective only those documents that lack the minimum essential requirements, and provided that such defects have not been remedied. E.11. Indicate whether the company is aware of the institutional investors' policy on whether or not to participate in the company's decision making: +----+------+ |YES | NO | +----+------+ | | X | +----+------+ +--------------------------------------------------------------+ | Describe the policy | +--------------------------------------------------------------+ | | +--------------------------------------------------------------+ E.12. Indicate the address and mode of access to corporate governance content on your website. Telefonica fulfils applicable legislation and best practices in terms of the content of the website concerning Corporate Governance. In this respect, it fulfils both the technical requirements for access and for content for the Company website, through direct access from the homepage of Telefonica, S.A. (www.telefonica.es) in the section "Information for Shareholders and Investors" (www.telefonica.es/accionistaseinversores), which includes not only all of the information that is legally required, but also information that the Company considers to be of interest. All the available information included on the Company website, except for certain specific documents, is available in three languages: Spanish, Portuguese and English. F DEGREE OF COMPLIANCE WITH CORPORATE GOVERNANCE RECOMMENDATIONS Indicate the degree of the company's compliance with existing recommendationson corporate governance or, where applicable, where it has not followed suchrecommendations. Should the company not comply with any of the aforementioned recommendations,explain the recommendations, rules, practises or criteria the company applies. Until the single document referred to in the ORDER ECO/3722/2003 of 26thDecember is completed, the recommendations of the Olivencia Report and theAldama Report should be used as a reference in completing this section. The fundamental rules of corporate governance structure in Telefonica areestablished in the Articles of Association, the Regulations of the GeneralShareholders' Meeting and in the Regulations of the Board of Directors. On May 22nd 2006, the Board of the National Securities Market Commission passed,as the single document of corporate governance recommendations, the Unified Codeof Good Governance, establishing with it the fact that companies listed on stockexchanges should take said Unified Code as reference on presentation, in thefirst semester of 2008, the Annual Report on Corporate Governance for thefinancial year 2007. As a result, and according to the guidelines established in Circular 1/2004 ofMarch 17th, issued by the National Securities Market Commission, there followsan analysis of the degree of compliance with the most relevant internationalCorporate Governance recommendations, including those formulated in Spain, bothin the Report published by the "Special Commission to Study an Ethical Code forthe Boards of Directors of Companies: Corporate Governance in Listed Companies",of February 26th 1998 (Olivencia Code) and the "Special Commission to encouragetransparency and security in the markets and listed companies", of January 8th2003 (Aldama report). PRINCIPLES OF CORPORATE GOVERNANCE "Existence of internal provisions to regulate the corporate governance system". The fundamental rules of corporate governance in Telefonica are set out in itsArticles of Association, the Regulations of the General Shareholders' Meetingand in the Regulations of the Board of Directors. The Regulations of the GeneralShareholders' Meetings establish the principles of the organisation andoperation of this body, thus complying with Law 26/2003 of 17 July. Moreover,the Regulations of the Board of Directors, as fundamental rules for corporategovernance of the Company, determine the principles of action for the Board ofDirectors, regulate its organisation and operation, and establish rules ofconduct for its members. In view of this, and as the basis of the corporate governance structure inTelefonica, the Regulations of the Board of Directors of the Company determinethe fundamental principles that should inspire the Board of Directors'activities: * General principles of action for the Board of Directors: The Board ofDirectors shall perform its duties with a view to the corporate good, understoodas the interest of the Company; and to this effect, shall act to ensure thelong-term feasibility of the Company and maximise its value, also pondering thelegitimate plural public and private interests that arise in the performance ofall business activity. * In relation to its shareholders: the Board of Directors, as the vehiclelinking the Company shareholders and management, undertakes the obligation toestablish the channels of communication necessary so that it may be aware of theproposals formulated by shareholders in relation to the Company management.Furthermore, the Board of Directors undertakes to guarantee parity of treatmentin its relations with shareholders. * In relation to the market: The Board is committed to carrying out the acts andadopting the measures required to ensure the transparency of the Company withregard to financial markets and to promote the suitable setting of the Companyshares, particularly avoiding manipulation and abuse of confidentialinformation. THE BOARD OF DIRECTORS "Express undertaking by the Board of Directors of the general supervisoryduties, as an undelegateable task, and the establishment of a list of mattersreserved for its knowledge". The Regulations of the Board of Directors establish this body basically as abody for the supervision and control of the Company activities, entrusting theday-to-day management of business to the executive bodies and the managementteam. Moreover, as established in these Regulations, those powers that arelegally or statutorily reserved for the exclusive knowledge of the Board, andthose necessary for the responsible performance of its basic supervisory andcontrol duties may not be delegated. In agreement with this, and within the scope of its supervisory and controlduties, the Board of Directors determines the management strategies andguidelines for the Company, establishes the bases of corporate organisation toguarantee its maximum efficiency, implements and oversees the establishment ofthe suitable procedures for the information of shareholders and the markets ingeneral, adopts the appropriate decisions regarding business and financialtransactions for the Company and approves its own organisation and operation toensure optimal performance of the aforementioned duties. COMPOSITION OF THE BOARD OF DIRECTORS "The operational size of the Board of Directors is suitable to thecharacteristics of the Company". Telefonica's Articles of Association establish that the Board of Directors iscomprised of a minimum of five and a maximum of twenty members. The complexityof the Telefonica Group, the significant number of companies within the Group,the variety of the sectors and countries in which it operates, itsmulti-national nature and its economic and corporate relevance amply justify thecurrent number of members is suitable to ensure that the Board operateseffectively. "Incorporation of a reasonable number of independent Directors on the Board.Majority of external or non-executive Directors over executive Directors.Presence of multi-national interests on the Board of Directors". Considering the present composition of the Board of Directors of Telefonica andthe principles that govern such composition - established in the Regulations ofthe Board - one may conclude that: (a) the Board has a significant number ofindependent Directors (eight); (b) external Directors (proprietary andindependent) comprise an ample majority over executive Directors (twelve vs.five); and (c) it has the significant participation of independent Directors,who represent a majority over proprietary Directors (eight vs. four). In addition, and given the multinational nature of the Telefonica Group, thereare three foreign Directors on the Board of the Company. It is also important tonote the existence of an International Affairs Committee to support the Boardwith regards to the international matters that may arise. OPERATION OF THE BOARD "Meetings of the Board: frequency, encouraging the participation of all members,care in drafting the minutes and an annual evaluation of its efficiency". To ensure the proper operation of the Board, its ordinary meetings are held oncea month and, at the discretion of the Chairman, as many additional times as isdeemed appropriate for the smooth operation of the Company. For ordinarysessions, the Board itself establishes a pre-set calendar at the beginning ofthe financial year, so that all the Directors are aware of the meeting datesbeforehand. In addition, the dates are again communicated at least three daysprior to the date scheduled for the meeting, together with the call for themeeting. With the same object in view, the Directors are sent the documentationrelated to the Agenda for the meetings with sufficient prior notice, and suchdocumentation is completed with the written presentations and documentsdistributed during the session itself. THE COMPANY CEO "Should the Board opt to endow the Chairman with CEO powers, it must adopt thedue safeguards to reduce the risk of concentrating power in a singleindividual." The Chairman of the Board of Directors is the Company CEO and is a key figure inthe Board of Directors. The Executive Chairmanship in Telefonica was establishedto ensure that the Company would benefit at all times from clear, directleadership both externally and internally, and from the flow of informationbetween the Company management and the Board, which is essential for the Board'seffective performance of its strategic and supervisory functions. In accordance with the Regulations of the Board of Directors, the actions of theChairman shall at all times be in keeping with the criteria and guidelinesdetermined by the General Shareholders' Meeting and by the Board of Directorsand the Board Committees. Likewise, all resolutions or decisions of specialimportance to the Company shall be submitted for the prior approval of the Boardof Directors or the relevant control Committee. Furthermore, the adoption ofcertain resolutions requires the reports and proposals from the different BoardCommittees, and it is important to note that the Chairman does not hold thecasting vote on the Board of Directors. SECRETARY TO THE BOARD OF DIRECTORS "Relevance of the figure of Secretary to the Board, reinforcing his/herindependence and emphasising his/her duty to ensure the formal and materiallegality of the actions undertaken by the Board". At present, the Secretary to the Board does not have Director status. Pursuantto the Regulations of the Board, the Secretary's essential task is to ensurethe formal and material legality of the Board actions at all times and toguarantee that its procedures and rules of governance are respected. THE EXECUTIVE COMMISSION "Existence of an Executive Commission with a composition similar to that of theBoard. The relationship between both bodies should be based on the principle oftransparency". Taking into consideration the structure of the Company's management, theExecutive Commission maintains similar balance to the one established for thecomposition of the Board of Directors. The relationship between the Board of Directors of Telefonica and its ExecutiveCommittee is based on the principle of transparency, such that the Board isfully aware of the matters deliberated and the decisions made by thisCommission. In line with this transparency, the matters deliberated alwayscomprise a point on the Agenda to be dealt with at the next Board of Directorsmeeting. THE BOARD OF DIRECTORS COMMITTEES "Existence of Committees for consultation or control, comprised exclusively ofexternal Directors, particularly for matters related to audit and control and onquestions of appointments and remunerations". The Board of Directors of Telefonica has established the consultative and/orcontrol committees recommended both by the Olivencia Code and the Aldama Reportand in particular, has an Audit and Control Committee (obligatory since the year2002) and a Nomination, Remuneration and Corporate Governance Committee,comprised of external Directors. Moreover, the Board also deemed it appropriate to create four additionalconsultative committees: the Regulation Committee, the Human Resources andCorporate Reputation Committee, the Service Quality and Customer ServiceCommittee, and the International Affairs Committee. Therefore, at the date on which this report is issued, there are sixconsultative and/or control committees in existence in the Company. THE DIRECTORS "Measures to ensure that Directors are provided with the necessary informationboth in time and form". The Company has adopted the measures necessary to ensure that Directors areprovided sufficiently beforehand with the adequate information, specificallydrafted and oriented at preparation of the sessions of the Board and itsCommittees. Under no circumstances may the importance or reserved nature of suchinformation be used as grounds for noncompliance with the guideline, except inabsolutely exceptional circumstances. "Formal, transparent procedure for the selection of Directors based on aproposal from the Nominating Committee". Proposals for the appointment of Directors are always made in compliance withthe Regulations of the Board and preceded with the relevant favourable reportfrom the Nominating, Compensation and Corporate Governance Committee. "Existence of regulations that establish the Directors' obligation to resign incases where their presence may have a negative affect on the operation of theBoard or the credibility or reputation of the Company. Establishment of an agelimit for holding Directorships". The Regulations of the Board of Directors envisages in its Title II theDirectors' obligation to resign in cases where their presence may have anegative influence on the operation of the Board or on the Company'scredibility or reputation. Moreover, pursuant to the provisions established inthe Regulations of the Board, Directors must place their office at the disposalof the Board and formalise the relevant resignation when they reach the age ofseventy (70). Executive Directors shall cease to hold their offices when theyreach the age of sixty-five (65), but may continue to act as Directors, if theBoard so decides. "Regulation of the obligations arising from the general duties of diligence andloyalty of Directors, particularly with regard to situations of conflict ofinterest, the exploitation of business opportunities and the use of corporateassets". In keeping with the recommendations of both the Olivencia Code and the AldamaReport, and in compliance with the provisions of the Transparency Law, theRegulations of the Board devotes its entire Title V, comprised of nine articles,to describing in detail the rights and obligations of the Company Directors.This title specifically envisages the general duties of diligence and loyalty ofDirectors and, in particular, situations of conflict of interest, theexploitation of business opportunities and the use of corporate assets. It alsoexpressly establishes the specific obligations arising from Telefonica'sposition as a listed company. "Formal recognition of Directors' right to obtain all the information andadvice to pursue their supervisory functions and the establishment of suitablearrangements for the exercise of this right". The Regulations of the Board of Directors formally recognises that Directors aregiven with the right to obtain information on all aspects of the Company, toexamine its books, records, documents and other data regarding corporatetransactions. With a view to avoiding any interruption in the ordinarymanagement of the Company, the exercise of this right to information shall bechannelled through the Chairman or Secretary to the Board of Directors, whoshall respond to the Directors' requests, giving them with the informationdirectly or establishing suitable channels within the organisation at theappropriate level. Likewise, Article 31 of the Regulations of the Board of Directors establishesthat for the purpose of assisting the Directors in the exercise of their duties,the external Directors in majority, or any of the Board Committees by majorityagreement of its members, may request the engagement of legal, accounting,financial or other experts, at the Company's expense. Such engagement mustnecessarily be related to specific problems of certain importance and complexitythat arise in the pursuit of their office. The decision to engage said services must be reported to the Company Chairmanand implemented by the Secretary to the Board, except when the Board ofDirectors does not consider such engagement necessary or appropriate. "A suitable remuneration policy for Directors, respecting the criteria ofmoderation, which should be proposed, evaluated and reviewed by the CompensationCommittee, and provide detailed, individualised information". The remuneration policy for Directors is proposed, evaluated and revised by theNomination, Remuneration and Corporate Governance Committee. In this respect,and pursuant to Article 38 in relation to Article 25 of the Regulations of theBoard, the Nomination, Remuneration and Corporate Governance Committee is thecompetent body for reporting on and proposing to the Board the system ofremuneration to Directors and for revising this system periodically in order toensure its adaptation to the tasks carried out by Directors. The Company givesindividualised information each year regarding the compensation received for theholders of offices or posts on the Board in the Annual Company Report.Furthermore, in line with the Aldama Report, external Directors do notparticipate in any compensation scheme that is linked to the listed value ofCompany shares. "Measures to extend the duty of loyalty to significant shareholders and SeniorManagement". The duty of loyalty of Directors is extended to significant shareholders,establishing that the Board of Directors reserves the right to be informed ofand to authorise all transactions between the Company and any of its significantshareholders. Under no circumstances shall the transaction be authorised withoutthe prior report issued by the Nomination, Remuneration and Corporate GovernanceCommittee, evaluating the transaction from the point of view of parity treatmentof shareholders and examining its conditions, which must be normal marketconditions. Moreover, and in line with the Aldama report, the Company has alsoextended the obligations arising from the duty of loyalty to the seniormanagement through the provisions of the Internal Code of Conduct with regardsto conflicts of interest. RELATIONS BETWEEN THE BOARD AND THE MARKETS "Rapid, accurate and reliable information to the markets and the establishmentto this effect of procedures and controls for the communication of informationwithin the Company. Regular financial information drawn up according to the sameprofessional principles and practises as the Annual Accounts and verified by theAudit Committee. The obligation to provide information and transparency,particularly with regards to corporate governance ". The Regulations of the Board devote various articles to setting out the channelsestablishing the relationship between the Board of Directors and the Companyshareholders, thus ensuring the greatest transparency possible in thisrelationship. The Board of Directors of Telefonica, going beyond the requirements establishedby the legislation in effect, is fully committed to the responsibility offurnishing the markets with rapid, accurate and reliable information. Inparticular, the periodical financial Company information, as expressly set outin the Regulations of the Board, is drawn up according to the same professionalprinciples and practises as the Annual Accounts and prior to publication isverified by the Audit and Control Committee, in keeping with the functionsattributed to this Committee. Furthermore, in line with the recommendations of the Aldama Report, the Companygives the market with all the information that may be considered relevant forinvestors. Pursuant to the obligations established in the Finance Law, theCompany reports relevant information to the National Securities MarketCommission prior to its publication in any other media, as soon as suchinformation is known, or as soon as the decision has been made or the agreementsigned with the third parties in question. The Company ensures that its reportsof relevant information are true, clear and complete at all times. Conscious of the relevance of this matter and due to its presence in a greatvariety of markets, Telefonica has undertaken a firm commitment to transparencyunderstood in this manner. This commitment is evidenced by the commission to itsBoard of Directors to carry out the acts and adopt the measures necessary to (i)ensure the Company's transparency in the financial markets, in particularinforming such markets of the acts, decisions or circumstances that may berelevant for the price of its shares; and (ii) promote the suitable pricing ofthe Company shares and, where appropriate, of its subsidiaries, taking specialcare to avoid manipulation and abuse of confidential information. RELATIONSHIP BETWEEN THE BOARD AND THE EXTERNAL AUDITORS "Establishment of measures to monitor the independence of the externalauditors". The Board of Directors has established a stable, professional relationship withthe Accounts Auditors through the Audit and Control Committee, with strictrespect for the Auditor's independence, thus fulfilling the recommendations ofthe Olivencia Code. Therefore, the Audit and Control Committee monitors anysituations that may jeopardise the independence of the Company's externalAccount Auditor and, in particular, supervises the percentage represented by thefees it is paid by the Company in the audit firm's total revenues. Finally, in keeping with the legislation in effect, the Company's Annual Reportincludes information regarding the fees paid to the external Accounts Auditor,including fees paid for non-audit services, and that, as indicated in sectionB.1.29, will be no greater than 2% of the amounts billed for auditing services. In compliance with the legal requirements established by legislation in theUnited States in this matter, and in line with the Aldama Report, audit andsimilar services provided by the external Company Accounts Auditor must bepreviously approved by the Audit and Control Committee. THE GENERAL SHAREHOLDERS' MEETING "Measures to make the mechanism for the delegation of votes more transparent,and to encourage communication between the Company and its shareholders". With regards to the mechanism in place for delegation of votes, Article 13 ofthe Regulations of the General Shareholders' Meeting establishes that allshareholders with a right to attend may be represented by another party, whoneed not be a shareholder. The representation must be granted specifically foreach Meeting, either using the proxy form printed on the attendance card or inany other way envisaged by law. Likewise, shareholders who do not hold theminimum number of shares required to attend the Meeting (300 shares) maydelegate the representation of such shares to a shareholder with the right toattend, or join together with other shareholders in the same situation to reachthe minimum number of shares. In this case, the grouping of shareholders mustappoint a single representative for the group of shares. * Amongst the measures established to encourage communication with shareholders,the following should be highlighted: (i) In addition to the documents and information required by law, incorporationon the Company website of all the information the Company deems appropriate withregards to the aforementioned objectives and, in particular, as an indication,the following: - The text of all the proposed resolutions to be submitted to the GeneralShareholders' Meeting that have been approved by the Board of Directors,without prejudice to their subsequent modification by the Board prior to thedate of the Meeting, when legally possible. - Information regarding the venue of the General Shareholders' Meeting anddescribing, if appropriate, the process for access to the hall. - Procedure for obtaining attendance cards or certificates issued by the legallyauthorised bodies. - Means and procedures to grant proxy for the General Shareholders' Meeting. - Should they exist, the means and procedures for remote voting. - All other issues of interest to follow the meeting, such as the existence ofmedia for simultaneous interpreting, audiovisual diffusion of the Meeting orinformation in other languages. The Company shareholders may obtain all of the aforementioned informationthrough the corporate website, or may request that it be sent to them free ofcharge through the mechanisms established on the website for this purpose. (ii) Means for the shareholders to submit suggestions. Shareholders may, at all times and after accreditation of their identity assuch, make suggestions related to the organisation, operation and competenciesof the General Shareholders' Meeting through the Shareholders' Office. Likewise, shareholders may request all the information, documentation andclarification they require in relation to the General Shareholders' Meetingthrough the Shareholders' Office, channelled either through the Company websiteor by phoning the toll-free line for this purpose. G OTHER INFORMATION OF INTEREST List and explain below the contents of any relevant principles or aspects ofcorporate governance applied by the company that have not been covered by thisreport. This section may include any other relevant, but not reiterative information,clarification or detail related to previous sections of the report. Specifically, indicate whether the company is subject to corporate governancelegislation from any country other than Spain and, if so, include the compulsoryinformation to be provided when this is different from that required for thisreport. CLARIFICATIONS GENERAL CLARIFICATION: It is stated for the record that the information setforth in this Report refers to the Fiscal Year ended December 31st, 2006, exceptwith respect to those matters where a different reference date is specificallyindicated. - Note 1 to Section A.2.) Additionally, at the date of December 31st 2006, CaixaHolding, S.A., Single Shareholder Company, of which the sole shareholder is "laCaixa", had sold 1,404,000 American put options, of which the underlying capitalis 0.03% of the share capital of Telefonica, S.A. - Note 2 to Section A.3.) On February 16th, 2007, the Director Mr. AntonioMassanell Lavilla informed the National Securities Market Commission that as aconsequence of his daughter, Ms. Gemma Massanell Bolet, reaching the age ofmajority, the total number of shares in Telefonica, S.A. that he owned bothdirectly and indirectly had decreased from 2,941 to 2,274 shares (all of themheld directly). Likewise, on March 6th, 2007, the Director Mr. Enrique Used Aznar informed theNational Securities Market Commission of his direct acquisition of 15,772 sharesin Telefonica, S.A., with the result that the number of direct shares owned bysaid Director is now 36,000. Likewise, on March 5th, 2007, the CEO of the Company, Mr. Cesar Alierta Izuel,informed the National Securities Market Commission of the acquisition of8,200,000 European call actions on shares in Telefonica, S.A., settled byoffset, to mature on March 2, 2011 and with an exercise price of 22 euros. Likewise, on March 13th, 2007, the Director Mr. Jose Maria Alvarez-PalleteLopez, informed the National Securities Market Commission of the direct purchaseof 6,200 shares in Telefonica, S.A., with the result that the number of directshares owned by said Director is now 15,715. Lastly, on March 20th 2007, the Director Mr. Carlos Colomer Casellas informedthe National Securities Market Commission of his indirect acquisition, throughthe company Ahorro Bursatil, S.A., SICAV, of 3,250 shares in Telefonica, S.A.,with the result that the number of indirect shares owned by said Director is now25,700. - Note 3 to Section A.5.) During the financial year 2006, Telefonica, S.A. soldits 33% stake in Uno e Bank, S.A. to Banco Bilbao Vizcaya Argentaria, S.A. forthe price of 149 million euros, to be paid in four instalments of 37,125,000euros each, pursuant to the prior agreement entered into between Telefonica andsaid company. - Note 4 to Section A.8.) The Board of Directors of the Company, in the sessionheld on March 28th, 2007, agreed to submit a proposed reduction in share capitalto the following General Shareholders' Meeting, to be held on May 9th in thefirst call or May 10th in the second call. Said reduction would be of147,633,912 euros, through the repayment of 147,633,912 own shares in treasurystock, in order to increasing the Company's profit per share, whichconsequently benefits all shareholders. - Note 5 to Section B.1.6.) On February 22nd 2007, the Director Mr. Fernando deAlmansa Moreno-Barreda was appointed Director of the company Telefonica MovilesMexico, S.A. de C V - Note 6 to Section B.1.8.) Sub-section a). The item "Fixed Compensation"includes both the sum of the salaries collected by the Directors in theircapacity as executives, and the sum collected by the members of the Board ofDirectors as a fixed allowance for belonging to the Board of Directors or itsCommittees. In order to ensure greater transparency in this area and in accordance with theinformation provided in the Company Annual Report for the financial year 2006,the salaries and allowances collected by the Directors of Telefonica, S.A. forthe year 2006 are detailed below. *Board of Directors. Fixed allowance collected by each Director (in euros): Chairman: 240,000.00 Vice Chairman: 200,000.00 Members (Executive, Proprietary, Independent): 120,000.00 Notwithstanding the above, it should be specified that: (i) Mr. Jose Maria Alvarez-Pallete Lopez was appointed Director of Telefonica,S.A. on July 26th 2006, with the sum of the fixed allowance collected from saiddate to be 50,000 euros. (ii) Mr. Miguel Horta e Costa occupied the position of Director of Telefonica,S.A. until March 29th 2006, with the sum of the fixed allowance collected by himto that date being 40,000 euros. (iii) Mr. Luis Lada Diaz occupied the position of Director of Telefonica, S.A.until July 26th 2006, with the sum of the fixed allowance collected by him tothat date being 80,000 euros. (iv) Mr. Mario E. Vazquez occupied the position of Director of Telefonica, S.A.until June 21st 2006, with the sum of the fixed allowance collected by him tothat date being 90,050.58 euros. *Executive Commission. Sum of the fixed allowance collected by each Directorforming part of the Executive Commission, according to his or her post (ineuros): Chairman: 80,000.00 Vice Chairman: 80,000.00 Members: 80,000.00 *Other Committees of the Board of Directors A) Sum of the fixed allowance collected by each Director forming part of theCommittees of the Board of Directors, according to his or her post (in euros): Chairman: 20,000.00 Members: 10,000.00 B) Total sum of per diem allowances provided during the financial year 2006 forattendance of meetings of consultative or control Committee, collected byDirectors forming part of said Committees, in total (in euros): - Audit and Control Committee. - Allowance per session: 1,250.00 - No. of sessions provided: 11 - Total collected: 46,250,00 - Nomination, Remuneration and CG Committee. - Allowance per session: 1,250.00 - No. of sessions provided: 11 - Total collected: 53,750.00 - Human Resources and Corporate Responsibility Committee. - Allowance persession: 1,250.00 - No. of sessions provided: 5 - Total collected: 21,250.00 - Regulation Committee. - Allowance per session: 1,250.00 - No. of sessions provided: 10 - Total collected: 45,000.00 - Service Quality and Customer Service Committee. - Allowance per session:1,250.00 - No. of sessions provided: 4 - Total collected: 12,500.00 - International Affairs Committee. - Allowance per session: 1,250.00 - No. of sessions provided: 3 - Total collected: 18,750.00 Likewise, the six Directors of the Company who participate in the AdvisoryCouncils of Catalonia, Andalusia, and Valencia collected during the financialyear 2006 a total of 78,749.76 euros. It is also stated that in the financial year 2006, a Directors' Social BenefitsPlan financed exclusively by the Company was passed. This complements thePension Plan already in place, and requires fixed contributions equivalent to aspecific percentage of the fixed remuneration of the Director, according to theprofessional category of same, and a number of extraordinary contributionsaccording to the circumstances of each Director, to be collected in accordancewith the conditions established in said Plan. In relation with said Social Benefits Plan, the total sum of contributions madeby Telefonica, S.A., by the date of December 31st, 2006, is of 11,279,303 euroswith reference to the following Executive Directors: Mr. Cesar Alierta Izuel,Mr. Jose Maria Alvarez-Pallete Lopez, Mr. Julio Linares Lopez and Mr. AntonioViana-Baptista. Finally, it is noted that the General Shareholders' Meeting of Telefonica,S.A., in its session held on June 21st, 2006, approved the application of a longterm incentives plan directed at the Executive Directors and managementpersonnel of Telefonica, S.A. and of other companies in the Telefonica Group,consisting of the transfer to the shareholders selected to this effect, providedthe necessary requirements set in the Plan are met, of a specific number ofshares in Telefonica, S.A. as variable remuneration. The total duration initially envisaged for the Plan is of seven years. The Planis divided into five cycles, each of three years long, each beginning on July1st ("Start date") and ending on June 30th of the third year following the StartDate ("End Date"). At the start of each cycle, the number of shares to betransferred to the beneficiaries of the plan will be determined according totheir level of fulfilment of the objectives set. Said transfer will take place,where appropriate, after the End Date of each cycle. The cycles are independentamong themselves, with the first cycle starting on July 1st 2006 (with transferof shares, where appropriate, from July 1st 2009) and the fifth cycle will starton July 1st 2010 (with transfer of shares, where appropriate, from July 1st2013). With regard to said Incentive Plan, the maximum number of shares correspondingto the first cycle of the Plan that will be transferred to each of the ExecutiveDirectors of Telefonica, S.A., in the case of fulfilment of the conditions setfor transfer, is as follows: Mr. Cesar Alierta Izuel, 129,183 shares; Mr. JoseMaria Alvarez-Pallete Lopez, 62.354 s h a r e s ; Mr. Peter Erskine, 181,762shares; Mr. Julio Linares Lopez, 65,472 shares; and Mr. Antonio Viana-Baptista,62,354 shares. - Note 7 to Section B.1.8.) sub-section b). The item "Fixed Compensation"includes both the sum of salaries collected from other companies in theTelefonica Group by the members of the Board of Directors in their capacity asexecutives, and the sum collected by the members of the Board of Directors as afixed allowance for belonging to the Board of Directors of one of the companiesin the Group, or one of their respective Committees. It is also specified that the sum encompassed by the item "Share options and/orother financial instruments" corresponds to the valuation of the 90,868 sharesthat the Director Mr. Antonio Viana-Baptista received on application of theShare Options Plan for the Company Telefonica Moviles, S.A. (the MOS Plan), asstated in the communication recorded in the National Securities MarketCommission on the date of July 13th 2006. - Note 8 to Section B.1.9.) With regard to the remuneration collected by SeniorManagers who do not belong to the Board of Directors as executives, it should benoted that the sum given includes the remuneration collected for the months fromJanuary to June of 2006 by Mr. Jose Maria Alvarez-Pallete Lopez, as hisappointment as Director took place in July of that year. Likewise and with regard to the abovementioned Directors' Social Benefits Plan,it should be noted that the total sum of contributions made by Telefonica, S.A.,to December 31st 2006, is a total of 4,571,434 euros in relation to the fourSenior Managers who comprised the Senior Management of the Company on the datementioned. Additionally and with regard to the abovementioned Long Term Incentives Planapproved by the Ordinary General Shareholders' Meeting on June 21st 2006, itshould be noted that the maximum number of shares corresponding to the firstcycle that shall be transferred to the four managers making up the SeniorManagement of the Company, in the case of fulfilment of the conditions set fortheir transfer, will be 157,046 shares. - Note 9 to Section B.1.10.) In general terms, senior management contracts formembers of the Executive Commission include a compensation clause consisting ofthree annual payments, plus an additional payment depending on their seniorityin the Company. Such annual payments comprise the last fixed remuneration antthe arithmetic mean of the sum of the last two variable remuneration paymentscollected under the contract. - Note 10 to Section B.1.24) Pursuant to the requirements of the US securitieslaws, the information set forth in the Annual Report on form 20-F (whichincludes the consolidated Annual Accounts of Telefonica Group) registered withthe Securities and Exchange Commission is certified by the Executive Chairman ofthe Company, Mr. Cesar Alierta Izuel, and by the Chief Financial Officer, Mr.Santiago Fernandez Valbuena. However, this certification takes place after suchAccounts have been prepared by the Board of Directors of the Company. - Note 11 to Section B.1.30) Fiscal year 1983 was the first fiscal year auditedby an independent auditing firm. Prior to that date, the financial statementswere reviewed by "censores de cuentas" (chartered accountants). 1983 istherefore the date used as the base for calculating the percentage for purposesof auditing the Individual Annual Accounts of Telefonica, S.A., and 1991 is thedate used to calculate the percentage for the purposes of the ConsolidatedAnnual Accounts, because 1991 was the first fiscal year for which the AnnualConsolidated Accounts of Grupo Telefonica were prepared. - Note 12 to Section C.1.) * The following operations included in the tableunder the section "Others" are derivative operations contracted in marketconditions: "La Caixa" - Grupo Telefonica - Contractual - Others - 1,233 BBVA - Grupo Telefonica - Contractual - Others - 215,825 BBVA - Telefonica, S.A. - Contractual - Others - 3,299,961 • The following operation included in the table under the heading "Others" isan account to be collected with BBVA for the sale of financial fixed assets: BBVA - Telefonica, S.A. - Contractual - Others - 111,375 Telefonica, S.A. sold its 33% stake in Uno e Bank, S.A. to Banco Bilbao VizcayaArgentaria, S.A. for the price of 149 million euros, to be paid in fourinstalments of 37,125,000 euros each, pursuant to the prior agreement enteredinto between Telefonica and said company. The balance remaining to be collectedon December 31st 2006 is of 111 million euros. * Likewise, Telefonica and BBVA signed an agreement establishing the procedureand conditions for the incorporation into Atento, a subsidiary of the TelefonicaGroup, of the national and international "contact center" business of the BBVAGroup. * Lastly, and in addition to the information included in this section, thecompanies of the Telefonica Group provide telecommunications and telemarketingservices to various companies of the BBVA Group and La Caixa, on market terms. -------------------------------------------------------------------------------- This annual corporate governance report was approved by the Company's Board ofDirectors at its session held on 28-03-2007. This information is provided by RNS The company news service from the London Stock Exchange