Expert Corporate Governance Service (ECGS)
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Proxy Report - 08/06/2018

We have serious concerns over the remuneration paid by the Group to the Lead Independent Director Mr. de Paz Mancho (€ 564'000 in 2017, € 485'000 in 2016 and € 500'000 in 2015), which seriously risks to compromise his independence. Therefore, we recommend that shareholders oppose his reappointment in item 3.2.

We also have concerns on the overrepresentation of the shareholders BBVA and CaixaBank, which are represented by 12% of Directors each with only 5% of the share capital. Therefore, we recommend that shareholders oppose the reappointment of Mr. Abril Pérez (item 3.3) and the appointment of Mr. Gual Solé (item 3.5), respectively representing BBVA and CaixaBank.

In item 6, shareholders are called to a binding vote on the 2019-2021 remuneration policy. The quality of disclosure is good, but we have serious concerns over the excessive fixed remuneration of the LID and the base salary of the executive Directors, which is used to calculate the variable remuneration. Although the fixed remuneration of the executive Chairman is 13.8% lower than that of his predecessor Mr. Alierta Izuel (Chairman-CEO until 2016), it is still significantly higher than the average of approximately € 1.1 million at largest European telecommunication companies. Furthermore, the annual bonus of the executive Chairman is capped at 233% of his base salary (194% for the CEO), significantly exceeding our voting policy limit of 150%. Also taking into account the egregious severance payments for the executive Directors (4 years of cash remuneration, significantly exceeding our voting policy limit of 2 years of remuneration), we recommend opposition. For the same reasons, we recommend that shareholders oppose the Annual Remuneration Report (advisory vote in item 10).

In item 8, we recommend that shareholders approve the 2018-2022 performance share plan. In our opinion, the Plan is adequately structured to achieve an alignment of interests between executives and shareholders in the long term, all performance conditions are disclosed and the maximum number of shares to be allocated to the Plan is in line with our voting policy limit of 5%.

Telefonica S.A.

Telefonica is engaged in the provision of public or private telecommunications services, including ancillary or complementary telecommunications services or related services. Co.'s fixed business includes: traditional fixed telecommunication services, Internet and broadband multimedia services, data and business-aplications services, and wholesale services for telecommunication operators. Co. also provides a range of mobile and related services and products to consumer and business customers, including mobile voice services, value added services, mobile data and Internet services, wholesale services, corporate services, roaming, fixed wireless, and, trunking and paging.


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