annual reporton corporate governance 2003 telefónica s.a

Annual Report on Corporate Governance 2003

Telefónica S.A.

01_ Introduction 04

02_ Shareholding structure 06

02.01 Share Capital 07

02.02 Significant Shareholdings 08

02.03 Relations with significant shareholders 08

02.04 Shareholdings of the members of the Board of Directors 10

02.05 Existence of shareholders’ agreements 10

02.06 Information on own portfolio 10

03_ Structure of the Board of Directors 12

03.01 Composition of the Board of Directors 13

03.02 Rules of organisation and operation of the Board of Directors 13

• Procedures for selection, appointment and removal of Directors• Operation of the Board of Directors• The Executive Committee• Other Committees of the Board of Directors

· Audit and Control Committee· Nominating, Compensation and

Corporate Governance Committee· Human Resources and Corporate Reputation Committee· Regulation Committee· Service Quality and Customer Service Committee· International Affairs Committee

03.03 Remuneration of the Board of Directors members 30

03.04 Additionalinformation on members of the Board of Directors 31

• Directors appointed in relation to Significant Shareholders• Members of the Board of Directors of Telefónica with management

or executive offices in other companies in the Group

04_ Information on related transactions and intragroup operations 34

04.01 Operations performed with significant shareholders 35

04.02 Operations performed with the directors and executives of the Company and of the Group 36

04.03 Significant operations performed with other companies belonging to the same Group 37

05_ Information on risk control systems 38

05.01 General model of the risk control system 39

05.02 Controls over the financial-accounting information process 40

06_ Relations with shareholders and markets 42

06.01 Operation of the General Shareholders’ Neeting 43

• Existence and description of the Regulations of the General Shareholders’ Meeting

• Rights of the shareholders in relation to the General Shareholders’ Meeting

• Data on attendance at previous General Meetings of Shareholders• List of the resolutions passed by the General Shareholders’ Meeting

06.02 Transparency and disclosure 46

• The Shareholders’ Office• Investor Relations Department• Market disclosure• Information provided through the web page

07_ Degree of compliance with the Corporate Governance recommendations 52

07.01 Telefonica, S.A. 53

07.02 Other companies in the Telefónica Group 58

42 52

06 12

04

34

38

04 Telefónica, S.A. Annual Report on Corporate Governance 2003

01Introduction

Annual Report on Corporate Governance 2003 Telefónica, S.A. 05

01

Introduction

The Annual Report on Corporate Governance ofTelefónica, S.A. (hereinafter “Telefónica”or the“Company”) for financial year 2003, approved byits Board of Directors, at its meeting held on 25thFebruary 2004, after the Nominating,Compensation and Corporate GovernanceCommittee report, aims to provide a detailedexplanation of the structures of the corporategovernance system of Telefónica and its practicaloperation to inform its shareholders andinvestors.

The Board of Directors provides the shareholdersthis Report, in fulfilment of the obligationestablished under “Act 26/2003, of 17th July, thatamends Act 24/1988, of 28th July on the StockExchange, and the reviewed text of the SpanishCompanies Act, approved by Royal Decree1564/1989, of 22nd December, in order toreinforce the transparency of the Spanish listedcompanies”(Transparency Act). In any case, onemust point out that the Company alreadypublished a first Report on CorporateGovernance relating to financial year 2002, priorto this report legally required.

In preparing this Report, the provisions of saidAct 26/2003 have been complied with, as well asthe provisions complementing such Actin“Order/3722/2003, of 26th December, on theannual report on corporate governance andother information instruments for listedcompanies and other firms”. Moreover,information has been included on other mattersthat may be of interest to shareholders andinvestors, such as that on the work carried out bythe Board of Directors and its Sub-committeesduring financial year 2003, or that related to thechannels of information between the Companyand the market. One must point out that all thedata contained in this Report refers to the

financial year ended on 31st December 2003,except in the matters for which another specificdate of reference is provided.

This Report also states the degree ofimplementation of Corporate Governancepractices in other listed companies within theTelefónica Group. In this sense, one must pointout that this Group has a total of 21 listedcompanies of six different nationalities andTelefónica has been the driving force to ensure allthese companies fulfil minimum standards ofcommon corporate governance, regardless oftheir nationality and the markets they are listedon, just as detailed in section 7.2 of this Report.On the other hand, the three Spanish listedcompanies in the Group have prepared theirrespective Reports on Corporate Governance toan identical structure to this Report, in order toprovide the shareholders homogeneousinformation in the matter, respecting, in all cases,the autonomy of decision of their respectivegoverning and executive bodies.

The fundamental principles of Telefónica’scorporate governance are set forth in its Articlesof Association and the Regulations of its Board ofDirectors. Both documents are available to theshareholders and investors at the Companyregistered office and on its web page.


02Shareholding structure


02

Shareholding structure

02.01 SHARE CAPITAL

On the date of this Report, the share capital ofTelefónica, subscribed and fully paid up,amounted to 4,955,891,361 euros, and it is dividedinto 4,955,891,361 shares of one euro face valueeach.

All the Telefónica shares are ordinary, of a soleseries, and are represented by account entries.

The shares are fully subscribed and paid up andgrant the same rights and obligations to allshareholders.Telefónica shareholders do nothave any accessory rights whatsoever. Likewise,the Articles of Association of Telefónica containno provision on privileges, special powers orrights arising from the holding of shares.Moreover, there are no statutory articles thatimpose any restriction or limitation on the freetransfer of the Telefónica’s shares.

Regardless of this, by virtue of what is set forth in“Act 5/1995, of 23rd March, on the legal regimefor the disposal of state shareholdings in certaincompanies”, the Council of Ministers approved“Royal Decree 8/1997, of 10th January, anApplication of the Regime of prior AdministrativeAuthorisation for Telefónica and othercompanies in its Group”in which it establishedthe need to request administrative authorisationprior to Telefónica adopting certain resolutions,especially relevant ones, once the Stateshareholding had totally disappeared.Acquisition of shares in Telefónica was alsosubject to the regime of prior administrativeauthorisation when giving rise to disposal of atleast 10 per cent of the relevant stock capital.

After amendment of “Act 5/1995, of 23rd Marchon the legal regime of disposal of state

shareholdings in certain companies”introducedby “Act 6/2003, of 30th December(Accompanying Act)”, there is now, in force as of18th February 2007, a regime of administrativeintervention (need for notification and power ofveto by the Spanish State) in relation to acts ofdisposal of shares of Telefónica that represent atleast 10 per cent of its share capital.

Lastly, and pursuant to the terms set forth in theCompany’s Articles of Association, noshareholder may cast a number of votesexceeding 10 per cent of the total Company’sshare capital with the right to vote existing ateach moment, regardless of the number of theshares held.When determining the maximumnumber of votes each shareholder may cast, onlythe shares each one is holder of shall becalculated, not including those of otherholders who have delegated representationon the former.

The limitation established in the precedingparagraph shall also be applicable to themaximum number of votes that maybe cast –jointly or separately – by two or moreshareholder companies belonging to a samegroup of companies, as well as the maximumnumber of votes that may be cast by ashareholding individual or corporation and theentity or entities that control these directly orindirectly control these.

Considering the total stock capital of Telefónica,and in relation to its present shareholdingstructure, that limit to the number votesestablished in its Articles of Association lacksapplication in practice, as at present there is noshareholder with a direct or indirectshareholding exceeding 7 per cent of theshare capital.


02.02 SIGNIFICANT SHAREHOLDINGS

To the extent that the Telefónica shares arerepresented by account entries, there thus beingno record of shareholders kept by the Companyitself, it is not possible to precisely ascertain itsshareholding structure.

In any case,according to the existing informationat the Company,one may say that there is noindividual or corporation that directly or indirectly,alone or jointly,exercises,or may exercise controlover Telefónica,on the terms established in article4 of the Securities Markets Act.

There are,however,certain shareholders who holdstakes that may be considered significant,in thesense of Ministerial Order 3722/2003,of 26thDecember,(see Table 1,Significant Shareholdings).

According to the information available to theCompany, during financial year 2003, there wereno significant changes in its capital structure.

In relation to these significant shareholders, thepersons identified in chapter III of this Reporthave been proposed as members of the Board ofDirectors.

In addition to these significant stakes held onstable terms, according to the notification issuedto the National Stock Exchange Commission on8th January 2003, the financial institution ChaseManhattan Nominees Ltd., held a stake of 6.80%in the stock capital of Telefónica, as depositoryentity, so that stake is held in name and on behalfof its customers.

Moreover, on 6th February 2004, the financialinstitution Citibank, NA held 242,688,336 sharesin Telefónica that represented 4.9% of its stock

capital, according to the internal reportsprepared by the Company itself.That stake isheld as established in the Depository Agreementgranted between the Company and Citibank NA,in name and on behalf of the holders of ADRs, forthe purposes of issue and trading of thosesocieties on the New York Stock Exchange andthe Stock Exchange of Lima. According to theterms of that agreement, Citibank N.A. is obligedto exercise the political and economic rights itholds according to the instructions it is sent bythe holders of ADRs, on the terms and conditionsestablished in the depository agreement.

According to the information obtained from“Sociedad de Gestión de los Sistemas de Registro,Compensación y Liquidación de Valores”(Securities, Recording, Clearing and SettlementSystems Management Company) (Iberclear),dated April 2003

1, the number of shareholders ofTelefónica, according to individualised records infavour of individuals and corporations,amounted to approximately 1,693,049

shareholders.

02.03 RELATIONS WITH SIGNIFICANTSHAREHOLDERS

The Company maintains ordinary commercialrelations with both significant shareholders, inrelation to which detailed information isprovided in section 4.1 of this Report.Theseoperations are performed under marketconditions, subject to the requisites concerningtransactions with significant shareholdersestablished in the Regulations of the Board ofDirectors.

As to the corporate relations there may be withthese shareholders, it is pointed out, in relation to

(1) As there is no register ofshareholders of the Company, the

last data that could be obtained byTelefónica is that included in the X-

25 requested from Iberclear whenthe last Ordinary General Meeting

of Shareholders of the Companywas held.


02


TABLE 2RELATIONS WITH SIGNIFICANT SHAREHOLDERS

Stake held Stake held Company by Telefónica by BBVA Activity

SPAINAdquira España, S.A. 40%(1) 40%(2) Providing telecommunications, internet and e-commerce services.Azeler Automoción, S.A. 50%(3) 50%(4) Automotive portal.Hispasat, S.A. 13,23% 10,75%(5) Operating satellite communications system.Iniciativas Residenciales

en Internet, S.A. 50%(3) 50%(2) Real estate portal.Mobipay España, S.A. 13,3%(6) 8%(2) Development of means of payment by mobile telephony.Mobipay International, S.A. 36%(7) 27,5%(2) Development of means of payment by mobile telephony.On line services for multiple

users, S.A. (SOLIUM) 33,3%(8) 33,3%(2) Providing technological services such as Internet support and operations.Telefónica Factoring E.F.C., S.A. 50% 30% Providing factoring services for the suppliers in the Telefónica Group.Uno-e Bank, S.A. 33%(3) 67%(9) Providing Internet banking services.BRAZILTelefónica Factoring Brasil, S.L. 59,98 10,24%(10) Providing factoring services for suppliers in the Telefónica Group.COLOMBIATelefónica Data Colombia, S.A. 65%(11) 35%(12) Providing telecommunications services.MEXICOAdquira México S.A. de C.V. 50%(13) 50%(14) Providing solutions to optimise the purchase and sale of goods and services between

companies.OTHER COMPANIESAtento, N.V. 91,35% 8,65%(15) Providing telemarketing services.

(1) Stake held through its subsidiary, Telefónica de España, S.A.U. (20%) and Telefónica Publicidad e Información, S.A. (20%).(2) Stake held through its subsidiary, Banco Bilbao Vizcaya E-Commerce, S.A.(3) Stake held through its subsidiary, Terra Networks, S.A.(4) Stake held through its subsidiary, Banco Bilbao Vizcaya E-Commerce, S.A. (25%) and Finanzia Banco de Crédito Local, S.A.(25%).(5) Stake held through its subsidiary, BBVA Factoring, S.A.(6) Stake held through its subsidiary, Telefónica Móviles España, S.A.U.(7) Stake held through its subsidiary, Telefónica Móviles, S.A.(8) Stake held through its subsidiary, Telefónica Data España, S.A.U.(9) Stake held through its subsidiaries, Banco Bilbao Vizcaya E-Commerce, S.A. (51%) and Finanzia Banco de Crédito Local, S.A. (16%).(10) Stake held through its subsidiary, BBVA Factoring, S.A.(11) Stake held through its subsidiary, Telefónica DataCorp, S.A.U.(12) Stake held through its subsidiary, Cidessa Uno, S.L. (100% owned).(13) Stake held through its subsidiary, Katalyx Inc.(14) Stake held through its subsidiary, Visacom, S.A. de C.V.(15) Stake held through its subsidiary, General de Participaciones Empresariales, S.L.

TABLE 1SIGNIFICANT SHAREHOLDINGS

Total Direct stake Indirect stakePercentage Shares Percentage Shares Percentage Shares

BBVA (*) 6.09% 301,813,784 1.81% 89,701,634 4.28% 212,112.150

“La Caixa” (**) 3.5% 173,456,198 – – – –

(*) According to the information provided by the Banco Bilbao Vizcaya Argentaria, S.A. (hereinafter, BBVA) in its AnnualAccounts on 31st December 2003. As the bank states in that document, the stake held with the criteria of continuedshareholding in the capital of is 5.17%.(**) According to the data provided by the Caja de Ahorros y Pensiones de Barcelona,“La Caixa” (hereinafter, La Caixa) on itsweb page, with information updated to 31st December 2003.


BBVA, that Telefónica, through its subsidiaryTelefónica de España, S.A.U., is the holder of36,215,223 shares in BBVA, which represents 1.13%of its stock capital.

On the other hand, Companies in whichTelefónica and BBVA hold joint Shareholding areshown in Table 2.

Moreover, as to La Caixa,Telefónica SolucionesSectoriales, S.A.U. (a subsidiary of Telefónica deEspaña, S.A.U.) holds 6.92% of the stock capital ofBarcelona Empren, S.A., in which the BBVA and LaCaixa each hold 6.92%. Likewise, that samesubsidiary of the Telefónica Group holds a 5% inthe company Foment de Ciutat Vella, S.A., inwhich BBVA holds 10% and La Caixa 12.5%.

Lastly, as to the possible existence of crossed orlinked Directors, it must be mentioned, inrelation to Telefónica, that Telefónica de España,S.A.U. was appointed a member of the Board ofDirectors of BBVA. At present, Mr Angel Vilá Boixrepresents that corporation on the Board ofDirectors of the company.

02.04 SHAREHOLDINGS OF THE MEMBERSOF THE BOARD OF DIRECTORS

According to the data available to the Company,the total number of shares in Telefónica heldindividually by the present Directors of thecompany, directly or indirectly, on the date of thisReport, amount to 747,763 shares (0.015% of thestock capital) (see Table 3, Shareholdings of themembers of the board of directors).

02.05 EXISTENCE OF SHAREHOLDERS’AGREEMENTS

Telefónica has received no notificationswhatsoever of the existence of agreementsbetween its shareholders.

02.06 INFORMATION ON OWN PORTFOLIO

On 31st December 2002,Telefónica had a total of91,631,076 own shares, that represented1,88516% of the stock capital of the Company.

During financial year 2003, and in fulfilment ofthe obligation to notify acquisition of ownshares,Telefónica, on 22nd October 2003,notified the CNMV, the accumulated acquisitionof a total 50,372,028 own shares (grosspurchases) that represented 1.016% of theexisting share capital on the date of thatcommunication. On that date, the position of thenet own portfolio of the Company was30,051,447 shares, that represented 0.606% oftheir share capital.

Lastly, one must state that, on 31st December2003,Telefónica had a total of 41,732,869 ownshares, that represented 0.842 % of the stockcapital of the Company.


02


TABLE 3SHAREHOLDINGS OF THE MEMBERS OF THE BOARD OF DIRECTORS

Number of Name Directly held Indirectly held shares held

Mr César Alierta Izuel 481,397 – 481,397

Mr Isidro Fainé Casas (1) 7,164 – 7,164

Mr José Antonio Fernández Rivero (2) 115 – 115

Mr Fernando de Almansa Moreno-Barreda 2,112 – 2,112

Mr Jesús María Cadenato Matía (2) 9,906 – 9,906

Mr Maximino Carpio García 5,836 – 5,836

Mr Carlos Colomer Casellas 543 – 543

Mr Alfonso Ferrari Herrero 1,811 99,500(4) 101,311

Mr José Fonollosa García (2) – – –

Mr Gonzalo Hinojosa Fernández de Angulo 37,958 – 37,958

Mr Miguel Horta e Costa 354 – 354

Mr Pablo Isla Alvarez de Tejera 386 – 386

Mr Luis Lada Díaz 30,000 – 30,000

Mr Antonio Massanell Lavilla (1) 2,106 642 (3) 2,748

Mr Enrique Used Aznar 19,450 17,988 (4) 37,438

Mr Mario E. Vázquez 10 – 10

Mr Antonio Viana-Baptista 21,994 – 21,994

Mr Gregorio Villalabeitia Galarraga (2) 53 – 53

Mr Antonio Alonso Ureba 8,438 – 8,438

Total 629,633 118,130 747,763

(1) Appointed at the proposal of La Caixa.(2) Appointed at the proposal of BBVA.(3) Stake held through relatives in the first degree.(4) Stake held through two controlled companies, one 60% and the other 100%.


03Structure of the Boardof Directors


03

Structure of the Board of Directors

The rules of organisation and operation of theCompany’s Board of Directors, and its Sub-committees are set forth in the Company’sArticles of Association and in the Regulations ofits Board of Directors. Both documents areavailable to all the shareholders and investors, atthe registered office of the Company and on itsweb page.

03.01 COMPOSITION OF THE BOARDOF DIRECTORS

Telefónica’s Articles of Association foresee thatthe Board of Directors shall be comprised of aminimum of five and a maximum of twentymembers, who shall be appointed by the GeneralShareholders’Meeting. Provisionally, accordingto the provisions contained in the SpanishCompanies Act and in the Articles of Association,the Board of Directors may cover existingvacancies by co-option.

Telefónica’s Board of Directors is now comprisedof nineteen Directors, a number that isconsidered adequate to ensure effectiveoperation, considering the complexity of theGroup the company heads, the significantnumber of companies that comprise it, thevariety of sectors in which it carries out itsactivity, its multinational nature, as well as itseconomic and corporate relevance.

As of the date of this Report, the Board ofDirectors of Telefónica is comprised of thefollowing persons (see Table 4, Composition of theBoard of Directors).

On the other hand, as of the date of this Report,the positions held by the Directors on the Board

sub-committees are specified in thefollowing Table 5.

As to the status of the Directors, the compositionof the Board of Directors of Telefónica fullycomplies with the recommendations in mattersof corporate governance, as it includes asignificant number of independent Directors(eight) and external Directors (proprietary andindependent) forming an wide majority over theexecutive ones (fourteen to five). Lastly, theindependent Directors are in majority in relationto the proprietary ones (eight to six).

The Regulations of the Board of Directors coverthe main rights and obligations of the membersof the Board, especially those arising from thefundamental duties of diligence and loyalty.

03.02 RULES OF ORGANISATIONAND OPERATION OF THE BOARD OF DIRECTORS

3.2.1 Procedures for selection, appointmentand removal of DirectorsThe main principles of organisation andoperation of the Board of Directors are set forthin the Articles of Association and Regulations ofthe actual Board, approved on 29th January 1997

and amended on 22nd July 1998, which isavailable for consultation at the registeredoffice of the Company and on its web page.Those Regulations also regulate theorganisation and operation of the ExecutiveCommittee and the Board sub-committees.

As already mentioned, according to the Articlesof Association, the Board of Directors will becomprised of a minimum of five and a maximumof twenty members.


TABLE 4COMPOSITION OF THE BOARD OF DIRECTORS

Type of Date of first Date of lastName Post director appointment appointment

Mr César Alierta Izuel Chairman (1) Executive 29-01-1997(8) 12-04-2002

Mr Isidro Fainé Casas Vice-Chairman Proprietary (6) 26-01-1994(8) 15-06-2001

Mr José Antonio Fernández Rivero Vice-Chairman Proprietary (7) 12-04-2002(8) 12-04-2002

Mr Fernando de Almansa Moreno-Barreda Director Independent 26-02-2003(8) 11-04-2003

Mr Jesús María Cadenato Matía Director Proprietary (7) 11-04-2003 11-04-2003

Mr Maximino Carpio García Director Independent 29-01-1997(8) 12-04-2002

Mr Carlos Colomer Casellas Director Independent 28-03-2001(8) 15-06-2001

Mr Alfonso Ferrari Herrero Director Independent 28-03-2001(8) 15-06-2001

Mr José Fonollosa García Director Proprietary (7) 11-04-2003 11-04-2003

Mr Gonzalo Hinojosa Fernández de Angulo Director Independent 12-04-2002 12-04-2002

Mr Miguel Horta e Costa Director Independent 17-03-1998 11-04-2003

Mr Pablo Isla Alvarez de Tejera Director Independent 12-04-2002 12-04-2002

Mr Luis Lada Díaz Director (2) Executive 10-08-2000(8) 15-06-2001

Mr Antonio Massanell Lavilla Director Proprietary (6) 21-04-1995 15-06-2001

Mr Enrique Used Aznar Director Independent 12-04-2002 12-04-2002

Mr Mario E. Vázquez Director (3) Executive 20-12-2000(8) 15-06-2001

Mr Antonio Viana-Baptista Director (4) Executive 12-01-2000(8) 04-02-2000

Mr Gregorio Villalabeitia Galarraga Director Proprietary (7) 27-02-2002(8) 12-04-2002

Mr Antonio Alonso Ureba Director-Secretary (5) Executive 28-03-2001(8) 15-06-2001

(1) Executive Chairman of the Company.(2) General Manager of Development, Planning and Regulation at Telefónica.(3) Executive Chairman of Telefónica de Argentina, S.A(4) Executive Chairman of Telefónica Móviles, S.A.(5) Secretary General of Telefónica.(6) Appointed at the proposal of La Caixa.(7) Appointed at the proposal of BBVA.(8) Appointed by the pre-emptive procedure, that appointment being confirmed at the General Shareholders’ Meeting immediately following.

TABLE 5COMPOSITION OF THE BOARD OF DIRECTORS

Executive Human Internat.Directors Committee Audit Appointment Resources Regulation Quality Affairs

Mr César Alierta Izuel XMr Isidro Fainé Casas XMr José Antonio Fernández Rivero X XMr Fernando de Almansa Moreno-Barreda XMr Jesús María Cadenato Matía XMr Maximino Carpio García X X XMr Carlos Colomer Casellas X XMr Alfonso Ferrari Herrero X X XMr José Fonollosa GarcíaMr Gonzalo Hinojosa Fernández de Angulo X XMr Miguel Horta e CostaMr Pablo Isla Alvarez de Tejera X XMr Luis Lada Díaz XMr Antonio Massanell Lavilla X X XMr Enrique Used Aznar X X XMr Mario E. VázquezMr Antonio Viana-Baptista XMr Gregorio Villalabeitia Galarraga X X XMr Antonio Alonso Ureba X X


03


The proposals for appointment of Directors mustbe preceded by a favourable report by theNominating, Compensation and CorporateGovernance Committee, which shall not bebinding.

In this sense, one must point out that theappointment of Directors at Telefónica is subject,as a general rule, to the decision of the GeneralShareholders’Meeting. Only on certain occasionswhen it is indispensable due to vacancies arisingsince the last General Shareholders’Meeting,may it proceed, as established in the SpanishCompanies Act, to appointment by co-option,with a prior report by the Nominating,Compensation and Corporate GovernanceCommittee, that decision being ratified, in allcases, by the first General Shareholders’Meetingheld thereafter.

The only appointment by co-option performedduring financial year 2003 was submitted by theBoard of Directors for ratification to the GeneralShareholders’Meeting and was granted afavourable report by the Nominating,Compensation and Corporate GovernanceCommittee.That appointment was ratified bythe Ordinary General Shareholders’Meeting heldon 11th April 2003 that also approvedappointment of another two members of theBoard.

The appointment of external or non-executiveDirectors must be assigned to persons ofrecognised solvency, competency andprofessional experience, who are willing todedicate a sufficient amount of their time to theCompany, being extremely thorough in relationto the selection of the persons called to cover anindependent Director position.

As to the appointment of independent Directors,the Regulations of the Board of Directorsestablishes that it may not propose or appoint tocover an independent Director position anyperson who has, or who has had a stable relationof certain relevance with the management ofthe Company, or who are linked for family,professional or commercial reasons to any of theexecutive Directors or other top management ofthe Company, and must also lack stable relationswith the proprietary Directors and with theentities or corporate groups represented bythem.

The Directors are appointed for a period of five (5)years and may be re-elected one or more timesfor equal times of maximum duration, and mustsubmit their letter of resignation to the Board ofDirectors when they reach the age of seventy (70)years.The executive Directors shall cease to holdoffice when they reach the age of sixty five (65),although they may continue to be Directors if sodecided by the Board itself.

Besides, the Directors must hand in theirresignation to the Board of Directors andformalise the relevant resignation: (i) when theycease to hold the executive post linked to theirappointment as Director, or when the reasons forwhich they were appointed disappear, (ii) whenthey incur in any legally foreseen causes ofincompatibility or prohibition, (iii) when theyreceive a severe admonition by the Nominating,Compensation and Corporate GovernanceCommittee due to having failed to fulfil any oftheir obligations as Directors, or (iv) when theirremaining on the Board may affect the credibilityor reputation the Company has on the markets,or put its interests at risk in any other way.


3.2.2 Operation of the Board of DirectorsThe Board of Directors is the supervisory andcontrolling body of the Company’s activity andexercises specific responsibilities in relation tothe strategy and direction of the business andco-ordination of its Group of companies,entrusting ordinary management of itsbusiness to the executive bodies andmanagement team.

The Articles of Association and Regulations ofthe Board of Directors foresee that the Board ofDirectors shall hold its ordinary meeting once amonth and, at the initiative of the Chairman, asoften as deemed appropriate for proper runningof the Company. According to this, the Board ofDirectors sets an annual calendar of ordinarymeetings. During financial year 2003, the Boardof Directors of Telefónica held 13 meetings – 11 ofthem ordinary and two extraordinary – ofapproximately four hours duration each.

As established in the Regulations of the Board,and except in cases in which another quorumhas specifically been set, the resolutions shall beadopted by the majority of the Directorsappearing at the meeting, present orrepresented.

In order to guarantee adequate preparation ofthe sessions and in order for the members of theBoard to have all the necessary information, thesessions have a pre-established Agenda, whichis notified at least three days before the date setfor the meeting to be held, along with thecalling of the session.To that same end, theDirectors are sent the documentation related tothe Agenda sufficiently in advance, it beingcompleted with the documentation and writtenpresentations that are provided when holdingthe meeting.

To provide the necessary information andclarifications in relation to some of the mattersdealt with, practically all the meetings of theBoard held in 2003 were attended by the mainexecutives of the Group, to matters within theirremit.

In order to provide information on the activitycarried out by this body during financial year2003, it is pointed out that the Board of Directorsof Telefónica has known, debated or taken therelevant decisions on the matters within itscompetence, among which the following mustbe emphasised as the most outstanding:

a) In relation to the Company’s finances:

• Results: On a monthly basis, a detailedpresentation has been made to the Boardsummarising the consolidated results of theTelefónica Group and its main Lines of Activity.

• Periodic financial information:The Board hasbeen presented financial information on eachquarter, or in each semester, on financial year2003, prior to its presentation to the Marketsand their regulatory Bodies.

• Economic information on Latin America: Giventhe importance to the Telefónica Group of itsinterests in Latin America, the Board hasperiodically monitored the economicsituation, as well as the evolution of thebusiness in the countries in that Region inwhich the Group is present.

• Other matters of a financial nature: Thepassing of resolutions on financial matters bythe Board has always been preceded by theDirectors being provided all the relevantinformation.Thus, during financial year 2003,


03


the following operations, among others, havebeen considered: issues of bonds by TelefónicaEurope, B.V., scheme to issue corporatepromissory notes, re-structuring of debt atTelefónica Argentina, S.A., etc.

b) In relation to the business of the Group :

• Strategic aspects and objectives: The Board hasdeliberated and adopted decisions on strategicaspects and objectives of the Group overall,and of its main Lines of Activity.

• Monitoring the activity: Apart frommonitoring the activity and controllingmanagement of the Group business, which isperformed monthly when the Board isprovided the preview of the consolidatedresults and the results of each Line of Activity(the Agenda of each meeting contains a pointtitled “Management Report”), on severaloccasions throughout financial year 2003

have been subject to a monographicexamination of the situation and theobjectives and strategies of the diversebusiness in the Group, with interventionbefore the actual Group by the top executivesof each Line of Activity.

• Regulatory aspects: The Board has beenperiodically informed and over the lastfinancial year has amply debated the mainregulatory matters that affect thetelecommunications Operators in the Group.Considering that, during financial year 2003, anew General Telecommunications Act waspublished in Spain, this new regulatoryframework has been analysed in special detail– especially as to fixed telephony –.Consideration has also been given, on diverseoccasions, to the regulatory aspects of the

diverse telecommunications businesses inLatin America.

c) In relation to the structure and organisation ofthe Company:

• Organisational Structure: The Board, followingexamination and a report by the Nominating,Compensation and Corporate GovernanceCommittee, has considered matters duringthat financial year related to theorganisational structure of the Company andits Group, and has passed major resolutions onrestructuring and design of the organisationin the months of September and December2003.

• Directors and Top Management: The Board,following a report by the Nominating,Compensation and Corporate GovernanceCommittee, passed 15 resolutions duringfinancial year 2003 on appointment ofDirectors and Top Management.

d) In relation to the internal control systems andother matters:

• Company’s market disclosure policy.. In additionto the Board having disclosed specific marketdecisions or operations, at its meeting on 26thMarch 2003, the Board of Directors approvedthe Disclosure Controls and proceduresRegulation that regulates the processes ofcommunication, both of specific and periodicinformation, establishing the generalprinciples that must be respected by theCompany in its communications.

• Operations with Significant Shareholders:TheBoard of Directors, following a report by theNominating, Compensation and Corporate


Governance Committee, has considered andapproved, as appropriate, transactions withthe holders of significant stakes in theCompany, in order to fulfil the termsestablished in the Regulations of the Board ofDirectors.

Moreover, during financial year 2003, after theappropriate analyses and reports, the Boardapproved diverse important operations andtransactions, among which the following may beemphasised as most relevant:

• Strategic alliance between Telefónica and TerraLycos to replace the strategic resolution of 16thMay 2000, to which the company BertelsmannA.G. was a party. Moreover,Telefónica,TerraNetworks, S.A., Lycos Inc, and Bertelsmann A.G.signed a preferential interest agreement thatwill continue to allow them to exploreopportunities of mutually providingcommunication services, developments andcontents to the “on line”market.

• Integration of the digital satellite televisionplatforms,Vía Digital and Canal SatéliteDigital, through an agreement betweenTelefónica de Contenidos, S.A.U., a subsidiary ofTelefónica, and Sogecable, S.A.

• Formulation by Telefónica of a Take-over toAcquire all the shares of Terra Networks, S.A.listed on the Spanish securities trading systemand the NASDAQ of the United States.

• Process of divestment by Telefónica in relationto its shareholding in Antena 3 de Televisión, S.A,a process that was mandatory to fulfil theterms established in the regulatory laws onprivate television then in force.That process ofdivestment was structured through two

operations both approved by the Board ofDirectors of Telefónica. On one hand, the Boardof Directors resolved to propose to theOrdinary General Shareholders’Meeting, heldon 11th April 2003, distribution of the PremiumReserve for the Issuance of Shares, by deliveryto the Telefónica’s shareholders of sharesrepresenting 30% of the Antena 3 sharecapital; and, on the other hand, at its meetingon 30th April 2003, the Board agreed to acceptthe offer presented by the Planeta Group for25.1% of the Antena 3 de Televisión, S.A. sharecapital.

Furthermore, as to the relation between theBoard of Directors and its sub-committees, onemust point out – notwithstanding what isdetailed in section 3.2 of this Report concerningthe activity by these Sub-committees –, that ateach ordinary monthly meeting of the Board ofDirectors, the Chairman of those sub-committees reports to the Board on the activityand main tasks and actions carried out by theseduring the period immediately preceding; towhich end, the Agenda of practically all theordinary sessions of the Board includes a pointcalled “Activities by the Board of Directors sub-committees ”.

3.2.3 The Executive CommitteeThe Board of Directors, as well as subject to thelegal provisions in force, has delegated itspowers and attributes, except those that maynot be delegated by law or statute, upon aExecutive Committee. That Committee providesthe Board of Directors greater operativity andefficiency in performing its duties, providing itthe necessary support through the work itcarries out, especially to the extent that itscomposition is smaller than that of the Boardand it meets more frequently than it.


03


The relations between both bodies are based ona principle of transparency, so the Board alwayshas full knowledge of the decisions adopted bythis Committee.Thus, the Board of Directors isinformed at each of its meetings of all theresolutions passed by the Executive Committee,to which end a summary of the Minutes of themeetings of that Committee are distributed toall the Directors, also proceeding to ratify thoseresolutions.

On the date of this Report, the ExecutiveCommittee of the Board of Directors is formed bythe following persons:

Members Date of appointment

Mr César Alierta Izuel, Chairman 27 January 1999

Mr Isidro Fainé Casas,Vice-Chairman 26 January 1994

Mr Jesús María Cadenato Matía,Spokesman 30 April 2003

Mr Maximino Carpio García,Spokesman 25 October 2000

Mr Carlos Colomer Casellas,Spokesman 28 March 2001

Mr Antonio Viana-Baptista,Spokesman 23 February 2000

Mr Gregorio Villalabeitia Galarraga, Spokesman 27 February 2002

Mr Antonio Alonso Ureba,Secretary 28 March 2001

The rules of operation of this Committee are setforth in the Regulations of the Board, whichgovern its composition, operation, and itsrelation to the Board of Directors.

Resolutions will be passed by the majority of theDirectors attending, and the Chairman shall cast

the deciding vote.The acting Chairman andSecretary to the Executive Committee shall bethe same persons as hold these offices on theBoard of Directors.

The meetings of the Executive Committee shallbe called at least three days before the dateforeseen to hold them (normally, they are sentout on the Friday prior to the Committeemeeting, which takes place on Wednesday), andthat calling includes an advance on theforeseeable Agenda of the meeting.

The Regulations of the Board foresee that theCommittee shall hold its ordinary meetingsevery fifteen days, and as often as called by itsChairman. In 2003, the Executive Committeeheld 19 meeting, with an average length of 3hours, most meetings having the intervention ofthe main Executives of the Group to explainmatters related to their respective area ofcompetence. No external advisors have attendedthe meetings of the Executive Committee.

During financial year 2003, the Committee hasexamined, in addition to matters related to theordinary management of the Company, mattersrelated to investment and divestmentoperations by the Company, and other strategicmatters.

3.2.4 Other Committees of the Boardof DirectorsThe Board of Directors of Telefónica has thefollowing sub-committees:• The Audit and Control Committee,• The Nominating, Compensation and

Corporate Governance Committee,• The Human Resources and Corporate

Reputation Committee,• The Regulation Committee,


• The Service Quality and Customer ServiceCommittee, and

• The International Affairs Committee.

3.2.4.1 Audit and Control CommitteeAS of the date of this Report, this Committee isformed by the following members:


Mr Antonio Massanell Lavilla,Chairman 30 August 2000

Mr Maximino Carpio García,Spokesman 29 January 1997

Mr José Antonio Fernández Rivero,Spokesman 12 April 2002

Mr Gonzalo Hinojosa Fernández de Angulo, Spokesman 26 June 2002

All the members of the Audit and ControlCommittee are non executive Directors.Moreover, according to the most recentinternational recommendations in this matter,all the members of this Committee havefinancial training, specifically, its Chairman hasample professional experience in financial andaccounting matters.The General Vice-Secretaryand Vice-Secretary to the Board of Directors, MrRamiro Sánchez de Lerín, is the acting Secretaryof this Committee.

As to the object and duties of this Committee,one must mention that the Board of Directors ofthe Company, in fulfilment of the obligationestablished by “Act 44/2002, of 22nd November,on Measures to Reform the Financial System”– additional provision eighteen –, submittedintroduction of a new article 31 bis to the Articlesof Association for approval by the OrdinaryGeneral Shareholders’Meeting held on 11th April

2003, that grants statutory rank to thatCommittee and regulates its composition andminimum competencies, pursuant to the newlegal requisites.That Ordinary GeneralShareholders’Meeting approved thatamendment to the Articles of Association withsufficient majority of capital.

The Audit and Control Committee has afundamental role in supervising the process ofpreparation and reporting of the Company’sfinancial information, acting as the controllerand co-ordinator of the different players involvedin them. In that sense, its work is aimed at fourfundamental matters:

1. To know the process of financial informationand evaluate the system for accountingverification of the Company,

2. To safeguard the independence of the ExternalAuditor, supervising its work and providing achannel for communication between theBoard of Directors and External Auditor,between it and the management team of theCompany.

3. To supervise the internal audit services and

4. To supervise the adequacy and integrity of theinternal control systems for financialinformation.

According to what is provided in said article 31

bis of the Articles of Association, the Audit andControl Committee must meet at least once aquarter and as often as appropriate, whencalled by the Chairman, at his own decision, orwhen requested by two of its members or theExecutive Committee. The Audit and ControlCommittee is validly constituted by direct


03


attendance, or representation of at least halfits members, and it passes its resolutions bymajority of those present. In the event of adraw, the Chairman shall cast the decidingvote.

However, in order to hold a greater number ofmeetings, the Audit and Control Committeeresolved, for financial year 2003, to meet at leastten times a year, to which end it prepared aschedule of meetings, arranging to meet on theFriday prior to the week when the Board ofDirectors of Telefónica meets.That Committeehas also met when the circumstances andmatters to be dealt with have so required.Thus,during financial year 2003, the Audit and ControlCommittee held thirteen meetings.

The meetings were held according to the pre-established Agenda and sent to the members ofthe Committee in advance, along with the callingto each meeting.The deliberations by thatCommittee and the resolutions and decisionspassed by it are documented in the minutes ofeach meeting.

These meetings were regularly attended by thepartner responsible for the Telefónica’sAccounts Auditor to explain and clarify, at therequirement of the Committee, aspects of theaudit report and the work performed by theExternal Auditor. Moreover, at the requirementof the Committee, other members of themanagement team of the Company and itssubsidiaries have participated to explainspecific matters that affect their respectiveareas of competency. Specifically, participationby those responsible for the financial area andaccounting consolidation as well as thoseresponsible for internal audit is emphasised.Themembers of the Committee held separate

meetings with each of the contacts when thiswas considered necessary.

To better perform its duties, and just as expresslyset forth in the Regulations of the Board, theAuditing and Control Committee may obtain theadvice of external experts.The Committee hasnot made direct use of this right, although it hasdedicated some of its meetings to analysespecific matters that required more in-depthknowledge, which were presented by experts atthe Company or by the External Auditor.

On the other hand, the Audit and ControlCommittee dedicated a monographic session inthe month of July to review its own operationand activity, taking the aforementionedlegislative novelties into account. Due to thatmeeting, the Audit and Control Committeeapproved an annual plan of activities, in whichthe main matters that must be dealt with by thisCommittee were dealt with during eachfinancial year, in relation to the followingmatters: (i) External Auditor, (ii) examination ofthe integrity of the Financial Statements, (iii)internal auditing and control systems, and (iv)intra-group relations.

Specifically, as to the work carried out by thisCommittee during financial year 2003, thefollowing matters are emphasised:

(i) In matters of financial-accounting information

• As to the Annual Accounts and theManagement Report, the Audit and ControlCommittee analysed and debated the mostrelevant aspects at the end of financial year2002, with special attention to the accountingof the main operations performed during thatfinancial year.


• This Committee has also been informed, priorto their public disclosure, on the quarterly andsemester results of the Company.

(ii) In relation to the External Auditor

• The Committee analysed the proposal ofappointment of the Accounts Auditor toTelefónica and its consolidated Group ofcompanies, later raising that proposal to theBoard of Directors, in order for it propose itsappointment to the Ordinary GeneralShareholders’Meeting.

• In one of the meetings of this Committee, theExternal Auditor provided a report on therelations between it and the Telefónica Group,as well as its view of the actual duties of theExternal Auditor in keeping with the legislativechanges that had taken place up to date.

• On the other hand, after publication of theregulations implementing the Sarbanes-OxleyAct in matters of External Auditorindependence, the Committee considered itsobligations in the matter and ordered theprocedures to engage the External Auditor tothe Group to provide any kind of permittedservice.Thus, the Committee has approved,after analysis and justification, the provisionby the Accounts Auditor to the Company ofcertain non-audit services.

• The Committee approved the fees of theExternal Auditor, in relation to the actual workauditing the annual accounts, as well as toperform audit related or other kind of services.

(iii) In relation to internal control and internalaudit and intervention matters.

• The Committee has been informed in detail ofthe actions carried out by the internal auditand intervention units of the Group.

• The Committee has analysed the risk map ofthe Group and its control model, and it hasbeen informed of the evaluations made fromthe internal audit services on the operation ofthe systems aiming at controlling theinformation reported by the Company to themarkets, and on the financial-accountinginformation control systems.

• Likewise, in the first session of the year, theinternal audit services presented their annualplan, and in October the Committeeconsidered the proposal for orientation of thework by the internal auditor for financial year2004. Moreover, the Committee was informedin several different sessions of specificsituations related to the work performed bythese services.

(iv) Other matters of interest analysed by theAudit and Control Committee.

• Analysis of the most relevant legislative andregulatory novelties that may affect theCompany, either Spanish2 or foreign, withspecial attention in the latter case to theregulations published by the SECimplementing the Sarbanes-Oxley Act.

• Presentation and information on the “AuditCommittees Information System”(e-SICA)– a computer system through which themembers of the Committee are keptpermanently up to date with the work beingperformed by the Audit and Control unitswithout detracting from the confidentiality ofthe information – and the “System for self-

(2) Act 44/2002, of 22nd November,on Measures for the Reform of theFinancial System (“Financial Act”),and Act 26/2003, of 17th July, thatamends Act 24/1988, of 28th July,

on the Stock Market, and theremodelled text of the Stock

Company Act, approved byLegislative Royal Decree 1564/1989,

of 22nd December, in order toreinforce the transparency of the

Spanish listed companies(“Transparency Act”).


03


evaluation of internal control”– a system thataims to provide a measure of the internalcontrol of all the companies of the TelefónicaGroup, by the managers filling outquestionnaires adapted specifically to theGroup.

• Analysis of the present situation of the newInternational Financial Reporting Standards(IFRS).

• Presentation on Computer Auditing: evolutionof the activity and plans for financial year2004.

3.2.4.2 Nominating, Compensation andCorporate Governance CommitteeOn the date of this Report, the compositionof the Nominating, Compensation andCorporate Governance Committee wasas follows:


Mr Alfonso Ferrari Herrero,Chairman 30 May 2001

Mr Maximino Carpio García,Spokesman 30 August 2000

Mr Pablo Isla Alvarez de Tejera,Spokesman 26 June 2002

Mr Gregorio VillalabeitiaGalarraga, Spokesman 27 February 2002

All the members of this Committee are externalor non executive Directors.The Secretary Generaland of the Board, Mr Antonio Alonso Ureba, actsas Co-ordinator of this Committee.

The main duties of this Committee are, amongothers, the following:

1. To report on the proposals for appointment ofthe Company Directors and executive officers;on the members of the Executive Committeeand other Committees of the Board ofDirectors, as well as the organisationalstructure of the Company;

2. To determine the Executive Chairmanremuneration regime and, if appropriate, thatof the Managing Director; to set the Directorsremuneration regime and review themperiodically to ensure their adequacy for theduties they perform, as well as to report on thevariable remuneration of the topmanagement;

3. To report on the incentive plans;

4. To prepare the Annual Report on CorporateGovernance.

The Nominating, Compensation and CorporateGovernance Committee set up a schedule ofmeetings for 2003 that allowed organisation ofthe tasks and responsibilities it has beenentrusted, it usually holding a monthly meetingin the days prior to that of the Board of Directors.

Ten meetings were held during 2003. Prior toholding the meeting, the Directors who aremembers of it are convened and sent the agendaforeseen in advance, as well as thedocumentation related to each of the points onthat agenda, for review and analysis by theDirectors on the Committee.

The Co-ordinator of the Meeting, Mr AntonioAlonso Ureba, General Secretary and Secretary tothe Board, takes the minutes of each one of themeetings and keeps the relevantdocumentation.


Throughout financial year 2003, theNominating, Compensation and CorporateGovernance Committee has had knowledge andhas reported, favourably in all cases, for laterapproval by the Board of Directors or by theExecutive Committee, on all Top Managementappointments and changes in the structure ofthe organisation that have taken place atTelefónica, as well as any of the subsidiarycompanies, as well as appointment of the newmembers of the Board of Directors ofsubsidiaries, for later approval by the Board ofDirectors of the relevant company.To performthat task, the Committee has examined thestatutory report on the post to be covered,issued by Human Resources, the Curriculum andprofile of the candidate, for adequateassessment of the office and the personproposed.

Likewise, throughout 2003, the Nominating,Compensation and Corporate GovernanceCommittee reported that there were no conflictsof interest in relation to members of the Board ofDirectors or Top Management of the Companyand it has supervised that the differentoperations performed with significantshareholders BBVA and La Caixa, have beenperformed under market conditions and haverespected the principle of parity in treatment ofthe shareholders.

At the request of the Chairman of Telefónica,in the first quarter of the year, the Nominating,Compensation and Corporate GovernanceCommittee reported on the Top Managementbonuses for financial year 2002, and in 2003 asignificant reduction was applied in relationto the economic results of the Group, that hadan especial effect on the Chairman andManaging Director.

As a duty of that Committee, the Stock Optionschemes of the different companies in the groupwere examined, concentrating analysis of theseon the problems of their application in relationto some of the parties who benefit from them.

Likewise, in fulfilment of one of the mainrecommendations of Corporate Governance, anevaluation of the Directors’compensation forfinancial year 2003 has been undertaken,according to the terms set forth in article 28 ofthe Articles of Association, and collaboration hasbeen requested, as in preceding years, by aspecialised external consultant, to prepare areport on the listed companies

Board members compensation.

Throughout financial year 2003, modificationshave been presented on two occasions in theOrganisational Structure of the Telefónica Groupby the Chairman of the Company, proceeding tostudy, analyse this and issue the favourablereport required by the Regulations of the Board.

In fulfilment of its basic responsibility,throughout 2003, this Committee has reportedon the appointment by co-option of a Board ofDirectors member and on the creation of a newBoard of Directors sub-committee, theInternational Affairs Committee.

Nominating, Compensation and CorporateGovernance Committee provided a favourablereport on the Regulations on Communication ofInformation to the Markets, prepared due to theneed to comply with the Sarbanes-Oxley Act, andaccording to the commitment acquired by theBoard of Directors at the last GeneralShareholders’Meeting to adopt the bestcorporate governance practices.


03


In order to comply with the Transparency Act forlisted companies, the Nominating,Compensation and Corporate GovernanceCommittee supervised commencement of thework to prepare the Regulations of the GeneralShareholders’Meeting and undertook the workto adapt the Regulations of the Board to theTransparency Act.

Finally, to continue the work undertaken lastfinancial year 2002, it continued the task ofexamining the situation of the Groupconsidering the recommendations of thedifferent Corporate Governance Codes, the draftof this Corporate Governance Report beingpresented and reviewed by this Committeeseveral times.

3.2.4.3 Human Resources and CorporateReputation Committee.On the date of this Report, the composition ofthe Human Resources and Corporate ReputationCommittee is as follows:


Mr Pablo Isla Alvarez de Tejera,Chairman 26 June 2002

Mr Alfonso Ferrari Herrero,Spokesman 26 June 2002

Mr Antonio Massanell Lavilla,Spokesman 22 July 1998

Mr Enrique Used Aznar,Spokesman 26 June 2002

All the members of this Committee are externalor non executive Directors.

Notwithstanding others it may be attributed bythe Board of Directors, this Committee has the

main duties, on one hand and in matters ofHuman Resources, of analysing, reporting andproposing that the Board pass the appropriateresolutions on matters of Company personnelpolicy; and on the other, in matters of CorporateReputation, to encourage progress on theCorporate Reputation Project of the TelefónicaGroup and implementation of its central values,to which end the relevant instruments and toolsshall be provided within organisation of theGroup.

During 2003, the Human Resources andCorporate Reputation Committee held fourmeetings. The meetings were held accordingto the Agenda previously set and sent to themembers along with the calling of eachmeeting. At all the meetings, the differentmatters submitted for deliberation and, ifappropriate, decision, were discussed in duedepth, with active intervention by all themembers in the different debates. Thedeliberations of the Committee, theresolutions and decisions made by it, arerecorded in the minutes of each meeting,prepared by the Secretary, Ms Consuelo BarbéCapdevila, Under-Director General of theCorporate Department, and later distributedamong the members for their approval andremarks. It is then submitted for approval, aspoint one of the Agenda, of the next meetingof the Committee that is held.

The meetings of this Committee are usuallyattended by members of the management teamresponsible for the corporate areas of HumanResources and Corporate Reputation.

During 2003, this Committee examined,debated and analysed the following mainmatters:


(i) In matters of Human Resources:

• The Committee was informed about thesituation of the staff at Telefónica de España,S.A.U. and as to alternatives to following inrelations with it, as well as the situation of the Collaborating Company system in matters of health assistance.

• Presentation of a new model of variableremuneration of the Telefónica Group andanalysis of the situation of the matters incourse on human resources, in all the lines ofactivity of the Telefónica Group.

• Specifically, those responsible for HumanResources of the main lines of business ofTelefónica, –Telefónica de España,Telefónica Móviles and TelefónicaInternacional –, presented the Management Report on Human Resourcesin each one of those lines to the Committeeat a monographic session held on 23rdJune 2003.

(ii) In relation to Corporate Reputation matters:

• The Committee was presented theMemorandum on Corporate Reputation andthe statement of the activities carried out inmatters of corporate reputation during 2002,and those foreseen for 2003.

• The “Monitoring Report on CorporateReputation”was presented to theCommittee, detailing the lines of workestablished to improve the corporatereputation within the Telefónica Group inaspects in which it is considered that thesemust be reinforced.

3.2.4.4 Regulation CommitteeOn the date of this report, the composition ofthe Regulation Committee is as follows:


Mr Enrique Used Aznar,Chairman 26 June 2002

Mr José Antonio Fernández Rivero,Spokesman 26 June 2002

Mr Antonio Alonso Ureba,Spokesman 26 June 2002

This Committee is formed by two external or nonexecutive Directors and by an executive Director.

The main objectives of the RegulationCommittee are the permanent monitoring of themain matters of regulatory order that affect theTelefónica Group at each moment and to providea channel for communication and informationbetween the management team and the Boardof Directors in regulatory matters.

The meetings of the Regulation Committee aregenerally held monthly, except when itsChairman decides not to convene it as no eventof especial relevance that need be debated by theCommittee has arisen during the period.There isan annual schedule of meetings that is approvedat the last meeting of the year immediatelypreceding. During 2003, the Committee met oneight occasions.

The meetings were held according to a pre-established Agenda and sent to the Committeemembers in advance, along with the calling foreach meeting.The deliberations by thisCommittee and the resolutions passed by it arerecorded in the minutes of each meeting.


03


The meetings of this Committee are usuallyattended by Mr Luis Lada Díaz, General Managerof Development, Planning and Regulation, andMr Javier de la Pinta García, Sub-director Generalof Corporate Regulation, as well as the Vice-Secretary General and of the Board of Telefónica,Mr Ramiro Sánchez de Lerín, who also acts asSecretary to it, and the Director of the LegalDepartment of Telecommunications, Ms MaríaVictoria Cerezo Rodríguez-Sedano. Her essentialfunction is to support the Chairman of theCommittee in more complex regulatory matters,or those requiring technical knowledge of thematter.

During financial year 2003, the RegulationCommittee analysed and debated the mostrelevant regulatory matters, to which end thecorporate regulatory and juridical departmentsprepare a general document on the regulatorysituation of the Telefónica Group, that is updatedat each meeting. Moreover, when the matterrequired, those responsible for regulation andexecutives of the different Telefónica businessLines were invited to provide a detailedpresentation of the regulatory problems in theirbusinesses.

Among the most relevant regulatory matterssubject to analysis by the Committee duringfinancial year 2003 one may point out thefollowing:

1. Analysis of the regulatory situation in Spain:the process of development of the GeneralTelecommunications Act and relevantRegulations, the actions of theTelecommunications Market Committee(CMT) that affect the Telefónica Group and thefiles open at different Companies, thesituation of tariff re-balance at Telefónica de

España, the undertakings acquired byTelefónica to develop the cable network,development of the wide band services inSpain, setting the new framework of tariffsand prices of Telefónica de España in the year2004, and flexibility of the financialcommitments linked to the UMTS thirdgeneration mobile telephony licence.

2. Analysis of the regulatory situation in LatinAmerica: the process has been followed toupdate the tariff framework in Argentina, andclaim measures against the Republic ofArgentina.The situation that has arisen in Perudue to the proposal to eliminate the basicrental has been analysed at several meetings,and the Committee was informed on theimpact on revenue and the actions taken.Likewise, specific monitoring has taken placeat several meetings of the claim ofunconstitutionality concerning the concessioncontract with Telefónica del Perú (TdP) thatfinally was not successful, and the Committeewas informed of the proceedings to request anextension to the concession agreement.Theprocess of renegotiation of the concessionagreement with Telesp and the issues relatedto the tariff readjustment in fixed telephonywere the most relevant matters dealt with bythe Committee in relation to Brazil. As to Chile,the Committee has monitored the process ofnegotiation of the new tariff framework for2004-2009.

3. Analysis of the regulatory situation in Europe:The Committee was also informed of thepossible impact in Spain of the EuropeanRecommendation on relevant markets and thedraft of Recommendation on Remediesprepared jointly by the European Committeeand the European Group of National


Regulators, as well as the activities performedby Telefónica along with other operators andmajor companies in the European sector in the“Brussels Round Table”initiative.

In 2003, the Regulation Committeecommissioned diverse studies by consultancyfirms and external legal advisors, related tospecific matters of special impact for theCompany, related to tariff re-balance ofTelefónica de España and in relation to the newGeneral Telecommunications Act.

3.2.4.5 Service Quality and Customer ServiceCommitteeAs of the date of this Report, the composition ofthe Service Quality and Customer ServiceCommittee is as follows:


Mr Gonzalo Hinojosa Fernández de Angulo, Chairman 26 June 2002

Mr Carlos Colomer Casellas,Spokesman 26 June 2002

Mr Antonio Massanell Lavilla,Spokesman 26 March 1999

All the members of this Committee are externalor non executive Directors.

The Service Quality and Customer ServiceCommittee has the fundamental mission ofstudy and monitoring the quality levels of themain services provided by the companies in theTelefónica Group, as well as the standards ofcustomer service.

In order for this Committee to know and be ableto analyse the fulfilment of the goals set, its

Chairman commissioned a summary of thevariables-objectives for each business line in theTelefónica Group for the year 2003. Moreover, aworking method has been provided that allows aquarterly report on each line of activity, related tothe evolution of its objectives, based on qualityindicators and ratios set for each on of itsbusinesses.

This Committee has met six times during 2003.The meetings follow a fixed Agenda, that is sentalong with the relevant documentation,approximately fifteen days before the date of themeeting. At each session, the Secretary to theCommittee, Ms Marta Turégano Martínez,Director of litigation Matters, takes the relevantminutes.The meetings of the Committee havebeen attended by diverse representatives of thedifferent lines of activity.

The main matters analysed during 2003 were asfollows:

• Analysis of the management charts sent bythe different lines of business, based on theindicators used for the quality monitoring, inorder to set objectives for 2003 and to showthe results obtained the previous year for tomaintain at least the quality levels.

• Presentation of the Quality Plan for LatinAmerica, called T-Latam Regional Plan, aimedfundamentally at setting global objectives toallow effective quality monitoring andperceived within the managementorganisation of the regional area.

• Presentation of the satisfaction study project ofthe Telefónica Group,that has the fundamentalobjective of evaluating the risk of customer lossand its reasons,as well as the priorities of the


03


Group when dealing with policies aimed atcustomer loyalty,considering the variety ofcountries in which the Group operates.

• Analysis of the model proposed by themarketing area for correct evaluation of thelevel of satisfaction generated by thecommercial brands of the Telefónica Groupand their effects on the perception andevaluation of the Group.

3.2.4.6 International Affairs CommitteeThe International Affairs Committee wascreated by the Board of Directors on 26thFebruary 2003 and formally constituted by aresolution of the Board of Directors on 28thMay 2003. As of the date of this Report, thecomposition of this Committee isas follows:


Mr Fernando de Almansa Moreno-Barreda, Chairman 28 May 2003

Mr Alfonso Ferrari Herrero,Spokesman 28 May 2003

Mr Luis Lada Díaz, Spokesman 28 May 2003

Mr Enrique Used Aznar, Spokesman 28 May 2003

Mr Gregorio Villalabeitia Galarraga, Spokesman 28 May 2003

All the members of this Committee are externalor non executive Directors, except for one, who isan executive Director.

During financial year 2003, this Committee heldtwo meetings.The meetings follow a fixedagenda, which is sent with the relevantdocumentation approximately three days beforethe date of the meeting. At each meeting, theSecretary to the Committee, Ms Marta Turégano

Martínez, Director of litigation Matters, takes therelevant minutes. Diverse representative of thedifferent lines of activity have attended themeetings of the Committee.

This Committee has the fundamental mission ofanalysing the international matters that arerelevant to the Telefónica Group, reporting theseto the Board of Directors when appropriate. Inthis sense, the Committee pays special attentionto institutional relations with the countries inwhich companies in the Telefónica Groupoperate, to the company’s competitive position,to strategy and corporate image matters, and tothe agenda and performance of the CompanyFoundations in such countries.

During 2003, the International AffairsCommittee analysed, among others, thefollowing matters:

• Examination of the general political-institutional situation in Latin America, withspecial reference to the social, political andeconomic situation in the countries whereTelefónica operates.

• Analysis of the objectives established byTelefónica Móviles in each one of the countriesin which the Company is present, and itsposition in relation to competitors.

• Review of the state of the InstitutionalRelations Plan project prepared in order todevelop the presence of Telefónica inInternational organisations and Forums.TheCommittee emphasises the importance of thisplan and of the creation of a corporate culturein the countries in which the Companyoperates, as well as in the differentinternational organisations and forums.


03.03 REMUNERATION OF THE BOARDOF DIRECTORS MEMBERS

The remuneration of the Directors of Telefónicaconsists of a fixed monthly allowance and perdiems for attending the meetings of the Boardsub-committees. Executive Directors may alsoreceive the relevant fees for performing theirexecutive duties.

Their regulation is set forth in article 28 of theArticles of Association, that indicate that thesum of the remuneration to be paid by theCompany to the Board of Directors is set by theGeneral Shareholders’Meeting, it being theactual Board of Directors which later distributesthat sum among the different Directors. In thatsense, the General Shareholders’Meeting heldon 11th April 2003, set the annual maximumgross sum of remuneration to be received by theBoard of Directors at 6 million euros, for fixedassignment and per diems for attending themeetings of the Board sub-committees. In thatsense, we may point out that, in line with thebest practices in this field, remuneration of theDirectors is linked to results.

The total amount of remuneration received bythe Directors of Telefónica during financial year2003 amounted to 10,900,943.98 euros:3,339,958.34 euros by fixed assignment,including the remuneration received forbelonging to the Board of Directors of othercompanies in the Telefónica Group; 120,247.86

euros in per diems for attending the meetings ofthe Board sub-committees, including per diemsfor attending the sub-committees of Boards ofDirectors of other companies in the TelefónicaGroup: 7,275,864.86 euros in wages and variableremuneration of the executive Directors;114,872.92 euros in remuneration in kind in

favour of executive Directors, that include lifeinsurance premiums; and 50,000 euros incontributions by the Company, as promoter, andin favour of the executive Directors, to pensionschemes.

The following tables detail the compensationand sums received by the Directors of Telefónicain that year:

Board of Directors. Annual amount of the setallowance received by each Director (in euros)

Offices 2003

Chairman 90,151.92

Vice-Chairmen 150,253.02

members3:Executive 90,151.92

Proprietary 90,151.92

Independent 90,151.92

Executive Committee. Annual amount of thefixed assignment received by each Director (ineuros):

Offices 2003

Chairman 60,101.19

Vice-Chairman 60,101.19

members 60,101.19

The Directors do not receive any per diems forattending the meetings of the Board of Directorsand the Executive Committee.

Other Board sub-committees. Annual amountof the per diems paid during financial year2003 for attending the meetings of the

(3) Moreover, one of the membersof the Board of Directors, who is

not resident in Spain, receives anadditional annual assignment of60,101.21 euros, due to the special

interest he has to the Companydue to his experience and

dedication in relation to LatinAmerica.


03


Board sub-committees, received by theDirectors overall:

Board-subcommittees 2003

Audit and Control Per diem for meeting:858.61 eurosNo. of meetings paid:9

Total received:26,616.91

Nominating, Per diem for meeting:858.61 eurosCompensation No. of meetings paid:6andCorporate Total received:24,899.69

GovernanceHuman Resources Per diem for meeting:858.61 euros

and Corporate No. of meetings paid:6

Reputation Total received:20,606.64

Regulation Per diem for meeting:858.61 eurosNo. of meetings paid:5


Service Quality and Per diem for meeting:858.61 eurosCommercial Care No. of meetings paid:4


International Affairs Per diem for meeting:858.61 eurosNo. of meetings paid:2


Executive Directors. Total amounts received bythe set of executive Directors for each one of thefollowing matters (in euros).

Items 2003

Wages 3,811,030.07

Variable remuneration 3,464,834.79

Remuneration in kind 114,872.92

Contributions to pension schemes50,000

The executive Directors Mr César Alierta Izuel,MrFernando Abril-Martorell Hernández (who

presented his resignation from the position ofManaging Director of the Company on 24thSeptember 2003),Mr Antonio J. Alonso Ureba,andMr Luis Lada Díaz,acting as directors of theTelefónica Group,were the beneficiaries of aremuneration scheme linked to the listed value ofthe Telefónica share, for the directors of theGroup,called “Plan TOP”, the term of which endedduring financial year 2003,without themexercising their options to Telefónica shares thatwere the object of that scheme,so those optionswere extinguished and became void.The cost toTelefónica of that remuneration scheme duringfinancial year 2003,as to the Executive Directorsparticipating in it,amounted to 1.02 million euros.

Moreover, one must point out that during 2003

the non executive Directors did not receive anyremuneration whatsoever in pensions or lifeinsurance, nor did they participate inremuneration schemes linked to the listed valueof the shares.

Lastly, the Company does not grant, nor has itgranted during 2003, any advances, loans orcredits whatsoever to the Directors, nor to any ofits main executives, in fulfilment of therequisites of the Sarbanes-Oxley Act published inthe United States, which is applicable toTelefónica as a company listed on that market.

03.04 ADDITIONALINFORMATION ONMEMBERS OF THE BOARD OF DIRECTORS

3.4.1 Directors appointed in relationto Significant ShareholdersJust as stated in section 2.1 of this Report,certain members of the Board of Directors havebeen appointed in relation to the significantshareholders.


Thus, the following directors have beenappointed in relation to BBVA:• Mr Jesús María Cadenato Matía• Mr José Antonio Fernández Rivero• Mr José Fonollosa García• Mr Gregorio Villalabeitia Galarraga

Moreover, in relation to La Caixa, the followingDirectors have been appointed:• Mr Isidro Fainé Casas• Mr Antonio Massanell Lavilla

All the Directors mentioned have or have had alabour or mercantile relation with the companiesin relation to which they have been appointedmembers of the Board of Directors of Telefónica.Thus, the offices held by each of these persons inthose companies are detailed below:

• Mr Jesús María Cadenato Matía is the MajorIndustrial Corporations Manager at BBVA.

• Mr José Antonio Fernández Rivero is a formerManaging Director of BBVA, now in earlyretirement.

• Mr José Fonollosa García is a former ManagingDirector of BBVA, now in early retirement.

• Mr Gregorio Villalabeitia Galarraga is a formerManaging Director of BBVA, now in earlyretirement.

• Mr Isidro Fainé Casas is the Managing Directorof La Caixa.

• Mr Antonio Massanell Lavilla is AssistantExecutive Managing Director of La Caixa.

On the other hand,we must point out that noneof the members of the Board of Directors of

Telefónica is, in turn,a member of the Board ofDirectors of either of these two companies.However,one must point out that Telefónica hasknowledge of the fact that Mr José AntonioFernández Rivero has been appointed to the Boardof Directors of BBVA at the General Shareholders’Meeting of that company held on 28th February.

3.4.2 Members of the Board of Directors ofTelefónica with management or executiveoffices in other companies in the GroupThe following are identified as members of theBoard of Directors of Telefónica who havemanagement or executive offices in othercompanies in the Group, specifying those officesin each case:

• Mr Fernando de Almansa Moreno-Barreda is amember of the Boards of Directors of thefollowing companies in the Group:TelefónicaMóviles, S.A.,Telefónica del Perú, S.A.A,Telecomunicaciones de Sao Paulo, S.A. (Telesp),and Telefónica de Argentina, S.A.

• Mr Jesús María Cadenato Matía is a memberof the Board of Directors of Uno-e Bank, S.A.

• Mr Maximino Carpio García is a member of theBoard of Directors of Telefónica Móviles, S.A.

• Mr José Antonio Fernández Rivero is Chairmanof Adquira España, S.A.

• Mr Alfonso Ferrari Herrero is a member of theBoard of Directors of Compañía deTelecomunicaciones de Chile, S.A. andTelefónica del Perú, S.A.A.

• Mr Miguel Horta e Costa is a member of theBoard of Directors of Telesp CelularParticipaçoes, S.A.


03


• Mr Luis Lada Díaz is a member of the Board ofDirectors of Telefónica Móviles, S.A. andSogecable, S.A.

• Mr Antonio Massanell Lavilla is a memberof the Board of Directors of TelefónicaMóviles, S.A.

• Mr Enrique Used Aznar is a member of theBoard of Directors of Terra Networks, S.A.,Telecomunicaciones de Sao Paulo, S.A. (Telesp)and de Telefónica del Perú, S.A.A.

• Mr Mario Eduardo Vázquez is ChairmanExecutive de Telefónica de Argentina, S.A. He isalso Chairman of the following companies inthe Group:Telefónica Móviles Argentina, S.A.,Telefónica Comunicaciones Personales, S.A.,Radio Móvil Digital Argentina, S.A., RadioServicios, S.A.,Telinver, S.A., Atento Argentina,S.A., Katalyx Argentina, S.A., Adquira Argentina,S.A., and Fundación Telefónica; he is also Vice-Chairman of the following companies:Telefónica Holding de Argentina S.A.,Compañía Internacional deTelecomunicaciones S.A. Lastly, he is theManaging Director of the followingcompanies in the Group: Katalyx Food ServiceArgentina S.R.L., Katalyx CataloguingArgentina S.R.L., Katalyx ConstructionArgentina S.R.L., Katalyx TransportationArgentina S.R.L.

• Mr Antonio Viana-Baptista is ExecutiveChairman of Telefónica Móviles, S.A. He is alsoa Director of the following companies:Telefónica Móviles España, S.A.,TerraNetworks, S.A., on behalf of TelefónicaDataCorp, Brasilcel, N.V,Tele Sudeste CelularParticipaçoes, S.A. and Telesp CelularParticipaçoes, S.A.


04Information on relatedtransactions and intragroupoperations


04

Information on related transactions and intragroup operations

04.01 OPERATIONS PERFORMED WITHSIGNIFICANT SHAREHOLDERS

As to operations with significant shareholders,the Company has established control measuresset forth under the Regulations of the Board ofDirectors, so it formally reserves knowledge andauthorisation of any transaction between theCompany and any of its significantshareholders, as well as following a report bythe Nominating, Compensation and CorporateGovernance Committee to analyse andevaluate the operation from the point of viewof parity in treatment of the shareholders andthe market conditions of the same. Moreover,the Directors related to those shareholders areobliged to abstain from the deliberation ofthose matters.

The two shareholders of Significant Stakes in thestock capital of Telefónica are financialinstitutions. According to this, the Company hasperformed operations with both companieswithin their ordinary activity, and always onmarket conditions.Thus, during financial year2003, the types of operations performed were asfollows:

a) As to the usual treasury transactions:

• Formalisation/renewal of financing lines.

• Formalisation of renting lines.

• Formalisation of factoring lines.

• Formalisation of banking services agreements:collection and payment of commercial andfinancial nature, administration and custodyof bank guarantees, custody of securities,credit cards, etc.

• Temporary Financial Investments, to placetreasury surplus.

• Sale of promissory notes of the companyaccording to the Telefónica Promissory NotesIssue Programme.

b) As to capital markets transactions:

• Formalisation of bonds or any other debtinstrument under any debt programme byTelefónica.

• Formalisation of operations with convertibleor exchangeable bonds, own shares, shares ofcompanies in the Group and financial stakes.

• Formalisation of syndicated loans.

• Formalisation of guarantees.

• Formalisation of derivative operations oninterest rates, exchange rates, political risk orcredit risk.

• Intermediation operations in stock exchangeoperations.

During financial year 2003, apart fromoperations aforementioned, the relevantoperations by the Company performed with anyof its significant shareholders, were as follows:

Restructuring of the debt of Telefónica DataColombia with BBVA Banco Ganadero

The Board of Directors of Telefónica – following afavourable report of its Nominating,Compensation and Corporate GovernanceCommittee –, resolved on 29th January 2003, toapprove the restructuring of the debt that


Telefónica Data Colombia had with theColombian institution BBVA Banco Ganadero,amounting to 26.051 million Colombian pesos(approximately 9 million euros), by novation ofpart of the loans granted by that Bank(amounting to approximately half that debt) andcapitalisation of an amount approximatelyequivalent to 4.5 million euros, that involvedsubscription by the said creditor Bank of sharesrepresenting 35% of the stock capital ofTelefónica Data Colombia.

Loan by BBVA to Telefónica Data Colombia

As resolved by the Board of Directors ofTelefónica on 30th April 2003 – passed followinga favourable report of its Nominating,Compensation and Corporate GovernanceCommittee –,Telefónica Data Colombia wasauthorised to apply for and obtain a loan fromBBVA of the sum of 5 million US dollars.

Appointment of Agent Entities to distribute theshares of Antena 3

On 24th September 2003, following afavourable report of the Nominating,Compensation and Corporate GovernanceCommittee, the Board of Directors of Telefónicaapproved the hiring of BBVA and La Caixa to actas Agent Entities to distribute the shares ofAntena 3 de Televisión, S.A. among theshareholders of Telefónica.

04.02 OPERATIONS PERFORMED WITHTHE DIRECTORS AND EXECUTIVESOF THE COMPANY AND OF THE GROUP

According to the information provided by theCompany, no member of its Board of Directors,

nor any executive4 of the Company,has performed operations with the Company in the course of the lastfinancial year.

In this sense, one must point out that,according to the terms established in theRegulations of the Board, the Directors mustabstain from intervening in deliberations thataffect matters in which they have a direct orindirect interest, or when they affect amember of their family or a company in whichthey have an executive office, or hold asignificant stake in its share capital. Likewise, theDirector may not directly or indirectly performprofessional or commercial transactions withTelefónica, or with any of the companies in theGroup, unless the Board of Directors, with theabstention of the Director affected, approvesthe transaction with the favourable vote of atleast 90% of the Directors present, andfollowing a report by the Nominating,Compensation and Corporate GovernanceCommittee.

Moreover, one must state that, as establishedin the Internal Code of Conduct for SecuritiesMarkets Issues of Telefónica, the Companydirectors are obliged to (a) act at all times withloyalty to the Group and to its shareholders,regardless of their own interests or those ofothers; (b) to abstain from intervening in orinfluencing any decision making that may affectthe persons or entities with which conflictexists; and (c) to abstain from accessinginformation classified as confidential thataffects that conflict. Moreover, these persons areunder the obligation to inform the RegulatoryCompliance Unit of the Company of suchsituations that may potentially lead to anyconflict of interests.

(4) To these ends, and pursuant tothe terms of Royal Decree 377/1991,

of 15th March, the term executiveshall be understood to mean

general managers and similar whohave top management duties

reporting directly to the governingbodies, executive commissions orManaging Directors of the listed

company..


04

Information on related transactions and intragroup operations

04.03 SIGNIFICANT OPERATIONSPERFORMED WITH OTHER COMPANIESBELONGING TO THE SAME GROUP

Telefónica is the parent company that heads aGroup of companies that perform theircorporate object through their stake in thesecompanies. According to the organisationalstructure of the Group and its co-ordinationpolicies, one must point out that, among others,its financial policy and, in some cases, the actualfinancial management is centralised throughthat parent company. According to this, most ofthe operations performed by the Company withthe companies belonging to its Group areoperations of a financial nature, to cover theirneeds for funds and coverage of interest rate andexchange rate risks.

According to this, as to financial year 2003, asrecorded in the individual Annual Accounts ofTelefónica ended on 31

st December 2003, thetotal credits to companies in the Groupamounted to 23,719.81 million euros, while thedebt with companies in the Group andassociates amounted to 25,512.67 million euros.

As to the balances with associated companies,one must point out that on 31

st December 2003,the financing provided to Sogecable, S.A.according to the commitments acquired in theagreements signed in relation to integration ofthe satellite platforms, the headings “Othercredits”long term and “Credits to associatedcompanies”short term on the ConsolidatedBalance sheet at 31

st December 2003, include anamount of 222.49 and 9.27 million euros,respectively, with that company. Moreover, onemust point out a long term balance of 64.65

million euros with Medi Telecom and a short

term balance with Ipse 2000, amounting to280.58 million euros.

Likewise, attention is drawn to the headings“Debtor associated companies”and “Debts toassociated companies”amounting to 48.18 and26.74 million euros, respectively, for thecompanies in the Group Brasilcel. In relation toMedi Telecom, these sums amounted to 9.33 and4.21 million euros in each heading.

On the other hand, the amount of sales andservices rendered that are recorded in the Profitand Loss Account for the financial year ended on31

st December 2003, are for sales to companies inthe Group, mainly the management contractwith Telefónica de Argentina, S.A In that sense, inNovember 1990,Telefónica and Telefónica deArgentina, S.A. entered into a managementagreement in force until 2003, which regulatedthe advisory services provided by Telefónica andthe price of these.The revenue received for thatitem during financial year 2003 amounted to28.02 million euros.

Apart from these operations of an ordinarynature, the 2003 Strategic Alliance betweenTelefónica and Terra Networks, S.A. must bementioned, as described in the relevantinformation on the decisions made by the Boardof Directors in section 3.2.2 of this Report.


05Information on riskcontrol systems


05

Information on risk control systems

05.01 GENERAL MODEL OF THE RISKCONTROL SYSTEM

Telefónica performs permanent monitoringof the most significant risks of the maincompanies forming its Group.To do so, theCompany has a map recording the risksrequiring specific control and monitoringaccording to their importance.With the sameobjective of permanent monitoring of the risksidentified, in November 2001,Telefónica set up aproject aimed at protecting one of the mostimportant assets of the Company: itsreputation.To do so, it identified the main risksto the reputation of the Company before itscustomers, shareholders and investors,employees, suppliers, partners, the media andsociety at large.

Identification of these risks and processes isperformed by the Directorate General of InternalAudit and Management Resources, which isresponsible for the Internal Audit department ofthe Company, and its results are reportedperiodically to the Audit and Control Committeeof Telefónica.

The 50 risks considered by the model areclassified in the following categories:

(i) Risks related to the business processes.• Operational risks• Integrity risks• management and human resources risks• Technological risks• Financial risks

(ii) Information risks.• Operating information• Financial information• Strategic evaluation

(iii) Risks related to the environment.

(iv) Corporate reputation risks.

In order to establish adequate control systems,Telefónica has a set of rules, approved by theBoard of Directors, that regulate the basicaspects of this system, as well asimplementation of the control systems.Themain internal regulations to these ends will be asfollows:

(a) Regulation on the registration, communicationand Control of financial/accounting information.

• Recording, communication and control of thefinancial-accounting information.

• Disclosure controls and procedures regulation.

• Intra-group operations: procedures forrecording, payment and conciliation.

(b) Regulations on control over the activities of theCompany personnel.

• Travel and hospitality expenses of theexecutives: limits, justification,reimbursement, etc.

• Regulations on physical safety andinformation.

(c) Regulations on external representation andlinks to the Company.

• Payments: segregation of duties, concurrentdouble signature, bank conciliations, etc.

• Powers of Attorney: to sign contracts, openaccounts, withdraw funds, etc.


Thus,Telefónica has certain units withresponsibilities for control over specific risks tothe Company, such as Risks and Insurance,Reputation, Regulation, Control of Managementand Human Resources (labour risks).

Lastly, the Company has an Intervention Unitfor control of application of the funds, controlof the relevant operations, control of traveland hospitality expenses, implementationof basic controls in the processes of greatestrisk, etc.

05.02 CONTROLS OVER THE FINANCIAL-ACCOUNTING INFORMATION PROCESS

Within the Company risks, due to its specialrelevance to investors and shareholders, onemust emphasise the control system over theprocess of financial-accounting information. AtTelefónica, that system is regulated through thefollowing manuals, instructions and regulations:

• Manual of Rules for Evaluation and AccountingPolicies.

• Instructions for closing and external audit.

• Annual calendar of financial-accountinginformation.

• Corporate Accounting Plan.

• Manual of the Subsidiary Information System(technical-computing instrument forreporting financial-accounting informationand to consolidate the financial statements).

• Rules of intra-group and internal controloperations.

In another order of things, one must point outthat all the companies in the Group haveinsurance coverage for reasonable protectionagainst the possible risks of damage to the fixedassets assigned to the operations and possibleloss of profit arising from this.These policiesinclude certain excesses. Management of thatinsurance is centralised at Group level within theSubdirectorate General of Corporate Risks andInsurance.


05

Information on risk control systems


06Relations withshareholders and markets


06

Relations with shareholders and markets

06.01 OPERATION OF THE GENERALSHAREHOLDERS’ MEETING

The General Shareholders’Meeting is thesupreme deciding body through which thecorporate will is expressed and, in that sense, theshareholders, legally and validly constituting theGeneral Meeting, decide by majority on thematters that lie within the remit of the Meeting,attributed to it by Law or the Articles ofAssociation.

6.1.1 Existence and descriptionof the Regulations of the General Shareholders’MeetingTelefónica foresees submission for considerationand approval, if appropriate, at its next OrdinaryGeneral Shareholders’ Meeting, of itsRegulations of the General Shareholders’Meeting, in which it establishes the rules andprinciples of its organisation and operation,thus fulfilling the terms of Act 26/2003, of 17

th

July. Until this takes place, the organisation,operation and development of the GeneralShareholders’ Meeting of Telefónica is governedby the terms of the Mercantile Laws in force andthe Articles of Association of the Company.

The General Shareholders’Meeting of theCompany is called by its Board of Directors, whichapproves not only convening of the Meeting, butalso the matters that are to be submitted fordeliberation and, if appropriate, resolution by theMeeting (Agenda), as well as the Proposals ofResolutions that are submitted for its approval,along with the reports that may be required onthose Proposals in each case.

Calling of the General Shareholders’Meeting, aswell as its Agenda, are published for theshareholders and public at large in the Official

Journal of the Mercantile Registry of Spain and inseveral national newspapers published in thecity where the Company has its registered office(Madrid, Spain). Likewise, the calling and Agendaof the Meeting shall be announced in othernewspapers that are widely read in the foreigncountries where the Company shares are listed,when the regulatory rules there so require, andalso in a financial daily that is widely read in thefinancial world.

6.1.2 Rights of the shareholders in relationto the General Shareholders’ MeetingThe rights of each and every one of theshareholders, in relation to holding the GeneralShareholders’ Meeting, are subject to thoroughrespect and treatment by the Company, on theterms and conditions established in theapplicable laws in force and in the Articles ofAssociation.

Those rights are, apart from to impugn thecorporate resolutions passed by the Meetingpursuant to the requisites established in the Act,the right to information, the right to attend andthe right to vote.

In order to facilitate and make possible theexercise of the right to information by anyshareholder, the proposals of resolutions to besubmitted for approval of the Meeting and thedocuments and mandatory reports related tothem, are made available to the shareholders onthe terms and conditions established in theSpanish Companies Act, from when theannouncements to call the Meeting arepublished.

Likewise, the Company attends, within thepossibilities of the requests for information inrelation to the matters on the Agenda of the


General Shareholders’Meeting, formulated byany shareholder, in the days immediately prior toholding the Meeting, as well as on the day of theactual Meeting being held, the agenda of whichexpressly includes a turn for shareholders tospeak, in which all shareholders attending theMeeting may speak and their interventions shallalways be replied to by the Chairman of theCompany.

As to the rights to attend and vote at the GeneralShareholders’Meeting, the Company facilitatesexercise of such right to the greatest extent,always within the framework provided by theapplicable laws in force and the Articles ofAssociation, especially that of representation ofthe shareholders at the General Shareholders’Meeting, which may be granted in favour of anyperson, even if not a shareholder.

Lastly, the manifestation of respect andguarantee ensured by the Company of the rightsof the shareholders in relation to the GeneralShareholders’Meeting, it must mention, on onehand, that formation of the roll of attendanceand calculation of the quorum of attendance forvalid constitution of the Meeting are entrustedto a firm of recognised prestige in its sector ofactivity, that acts subject to accreditedprofessional practice; and on the other hand,that the Board of Directors requires the presenceof a Notary Public to take the Minutes of theGeneral Shareholders’Meeting.

6.1.3 Data on attendance at previousGeneral Meetings of ShareholdersIn the last three years, the General Shareholders’Meeting of Telefónica has held three ordinarysessions, the attendance data of which is asfollows:

Ordinary General Shareholders’ Meeting of 15 June 2001

Shareholders present: 907

Shareholders represented: 110,936

Total shareholders 111,843

Shares present: 2,277,209

Shares represented: 1,772,729,452

Total shares 1,775,006,661

Percentage of sharecapital 39.02%

Ordinary General Shareholders’ Meeting of 12 April 2002

Shareholders present: 864

Shareholders represented: 121,069

Total shareholders 121,933

Shares present: 2,220,812

Shares represented: 1,688,052,956

Total shares 1,690,273,768

Percentage of share capital 35.47%

Ordinary General Shareholders’ Meeting of 11 April 2003

Shareholders present: 1.139

Shareholders represented: 115.411

Total shareholders 116.550

Shares present: 2.848.105

Shares represented: 2.032.297.555

Total shares 2.035.145.660

Percentage of share capital 41.05%

6.1.4 List of the resolutions passedby the General Shareholders’ MeetingDuring financial year 2003, the OrdinaryGeneral Shareholders’ Meeting of Telefónica, atits meeting held on 11th April 2003 (the only onethat took place during that financial year),


06


passed the resolutions stated below, that weresubject to the relevant notification to the CNMVas a relevant fact on 11th April 2003. The sectionof the Company web page on the GeneralShareholders’ Meeting also providedinformation on these resolutions.

The resolutions passed by the Ordinary GeneralShareholders’Meeting, held on 11th April 2003,are summarised as follows:

• Point I of the Agenda: Approval of the AnnualAccounts and Management Report, ofTelefónica and its Consolidated Group ofCompanies, as well as the proposal forapplication of the result (compensation oflosses against reserves) by Telefónica and onthe management by its Board of Directors, allin relation to financial year 2002.

• Point II of the Agenda: Modifications withinthe Board of Directors: it proceeded to re-election of Mr Miguel Horta e Costa, toratification of the appointment by pre-emption of the Director Mr Fernando deAlmansa Moreno-Barreda, performed by theBoard of Directors on 26

th February, andappointment as Company Directors of the saidMr Fernando de Almansa Moreno-Barreda, MrJesús María Cadenato Matía, and Mr JoséFonollosa García.

• Point III of the Agenda: Appointment of theAccounts Auditor for financial year 2003,granted to the firm of auditors Deloitte &Touche España, S.L. (formerly called DeloitteEspaña, S.L. and prior to that Arthur Andersen yCía. S.Com) as Accounts Auditor to audit theAnnual Accounts and Management Reports ofTelefónica and its Consolidated Group ofcompanies for financial year 2003.

• Point IV of the Agenda: Authorisation toacquire own shares, directly, or throughcompanies in the Group.

• Point V of the Agenda: Delegation in favour ofthe Board of Directors of the power to issuebonds, promissory notes and other fixed yieldbills, simple, exchangeable and/or convertible,with the attribution, in the latter case, of thepower to exclude the pre-emptive right of theshareholders and holders of convertiblesecurities, and the power to guarantee issuesby the subsidiary companies.

• Point VI of the Agenda: Reduction of the sharecapital by amortisation of own shares, withexclusion of the shareholders’right toopposition.

• Point VII of the Agenda: Amendment of article28 of the Articles of Association (transparencyand publicity of remuneration of theDirectors), creation of a new article 31 bis(Audit and Control Committee of the Board ofDirectors), and addition of a new section 4 toarticle 35 (distribution in species of dividendsand return in species of the issue premium orcontributions in the case of capital reduction).

• Point VIII of the Agenda: Setting the limit to theannual remuneration to be received by theBoard of Directors as a whole pursuant to newarticle 28.1 of the Articles of Association.

• Point IX of the Agenda: Extraordinarydistribution of the issue premium in moneyand in species: (a) Distribution in money:Distribution of the issue premium by paymentof each and every one of the current shares inthe Company of 0.25 euros per share, makingthe relevant charge in the Premium Reserve for


Share Issue; (b) Distribution in kinds:Distribution of the Premium Reserve for ShareIssue, by delivery to the shareholders ofTelefónica, S.A. of shares representing 30% ofthe stock capital of Antena 3.

• Point X of the Agenda: Delegation of powers toformalise, interpret, correct and execute theresolutions passed by the GeneralShareholders’Meeting.

06.02 TRANSPARENCY AND DISCLOSURE

Several articles of the Regulations of the Board ofDirectors of Telefónica are assigned to regulatethe channels through which relations areestablished between the Board of Directors andthe shareholders of the Company (of theindividual shareholders, as well as theinstitutional and investment shareholders) so itmay thus ensure the greatest possibletransparency in those relations.

It also expressly establishes that the Board ofDirectors, in its relations with the shareholders, isobliged to guarantee equal treatment.

6.2.1 The Shareholders’ OfficeIn order to maintain permanent, exclusivecontact with its shareholders, Telefónica has aShareholders’ Office. This service facilitates anddiscloses all the relevant information for theshareholders and attends specifically to thequeries that may be raised by any shareholder,managing them through its call center, its webpage, or by mail.

As to the operation of this service duringfinancial year 2003, the following data isprovided:

• The number of calls received by Telefónica onthe Toll Free Line, 900 111 004 (operates fromMonday to Friday, 9 to 19 hours) amounted to105,936.

• The queries made through the CustomerService Web Site amounted to 2,313.

• On a quarterly basis, more than 660,000

copies were distributed of a publication thatprovides information on the quarterly results,as well as economic-financial events that maybe relevant to the shareholder.

• Individual information was sent by mail to 2,640

addresses and 2,313 queries were attendedthrough the Customer Service Web Site.

Telefónica also participates in specialised Forumson the stock exchanges and other markets(Madrid, Barcelona and Valencia) aimed at thespecific investor, where presentations weremade on management and the perspectives ofthe Company and its Group.

Lastly, in order to improve the quality of theinformation that the Shareholders’Officesupplies,all the queries managed through a callcenter,web page and mail are computerprocessed to be able to perform qualitative aswell as quantitative analysis,and thus to improvethe channels of communication and correctpossible deficiencies.The distribution of queriesby matters of interest to Telefónica shareholdersin 2003 is analysed in the chart Distribution ofqueries addressed to the shareholder’s office callcenter.

6.2.2 Investor Relations DepartmentOn the other hand, in order to provide personalattention to Institutional Investors, Telefónica

DISTRIBUTION OF QUERIES ADDRESSEDTO THE SHAREHOLDER'S OFFICE CALL CENTER

Securities andpromissory notes1%

Shareholderremuneration22%

GeneralShareholders’Meeting23% 42%

Evolution on theStock Exchange

and Listings

Resultsand relevant events

12%

Special financial operations0%


06


has an Investor Relations Department. Thatdepartment has the most relevant duty ofdesigning and executing the communicationprogramme at Telefónica for the national andinternational financial markets, in order topublicise and explain the main strategic,organisational, operational and business actionsof the Company, as well as to periodically reporton the financial results arising from its activity.Through this department, Telefónica informsthe financial markets of all necessary relevantinformation to form expectations on its futureperformance, thus participating actively toadequate setting of the price of the securitiesissued by the Company.

In 2003, following the policy of transparency inthe communication and disclosure ofinformation to institutional investors andfinancial analysts, a high level of activity hasbeen maintained through presentations atforums, in holding meetings and conferencecalls, organisation of road shows in the mainfinancial cities, and in holding the Third AnnualInvestors’Conference. In this sense, excludingthe later, meetings were held throughout 2003

with nearly 350 investment institutions, with theCompany management team participatingactively in the communication tasks.

The central axis of communication withinvestors and analysts are the quarterlypresentations of results by the Company, inrelation to which the Investor Relationsdepartment makes a special effort atcommunication in which it combines thepreparation of the Quarterly Report on Resultsand registration at the CNMV, with conferencecalls in which the management team analysesthe results obtained, that may be followed bytelephone or on the Internet (webcast),

guaranteeing universal access to theinformation in real time.The conference calls in2003 had an total average audience ofapproximately 190 participants, betweentelephone calls and the Internet.

The same means and structure are applied tospecific conference calls organised to explainrelevant strategic operations and decisions tothe financial markets, after the appropriatenotification to the relevant regulatory bodies.This category includes placement of an issue ofbonds amounting to 2,000 M¤ completed in thefirst quarter of 2003.

Within the Company CommunicationProgramme,along with the quarterlypresentations of results,one must especiallymention the Third Investors’and Analysts’Conference held on 9th and 10

th October in Madrid,at which the main landmarks of the Strategic Plan2004-2006 were reviewed,as presented by theChairman and Executives of the main businesslines of the Telefónica Group.On that occasion,thecompany gathered more than 280 participants,continuing with the clear trend in improving thequality of the audience as,for the secondconsecutive year, there was an increase inparticipation by institutional investors.Anothersign of the scope of the Conference was shown bythe number of hits on the specific web sitedesigned for that purpose,that received half amillion page visits just in the month of Octoberand exceeded 77,000 files downloaded.

The Communication Programme prepared by theInvestor Relations department was completed byeight road shows in Europe, the United States andBrazil, in which meetings were held with nearly200 investors,as well as participation in the mainsectorial fixed and variable yield conferences


organised by financial institutions in the mainEuropean and American cities.

In recognition of the effort at communicationmade during financial year 2003, the InvestorRelations department was named the secondbest team in the EuropeanTelecommunications sector by the ThomsonExtel Pan-European Survey, a benchmark surveyon the financial markets, in which more than1,000 listed companies participated, as well asthe main investment banks and fundmanagement firms.

6.2.3 Market disclosureIn compliance with the terms foreseen in theapplicable laws, the Company informs each andevery one of the regulatory bodies of themarkets on which its securities are traded,through the relevant communications ofrelevant facts and other communications,punctual information on any significant eventthat arises in relation to its business. Duringfinancial year 2003, Telefónica issued a total ofsixty six (66) communications, as shown in theTable 6, Market disclosure.

On the other hand, the company provideinformation to the investors and shareholdersthrough different Informative Prospectusespublished, of annual as well as exhaustive globalinformation on the Company, its business andeconomic-financial information, as well as thebrief ones that have been recorded at thedifferent regulatory bodies of the securitiesmarkets due to a specific operation.Thus, during2003,Telefónica registered the followingProspectuses:

• The Continued Informative Prospectus onfinancial year 2002, registered on the official

registries at the National StockExchange Commission on 16 September 2003.

• The brief Informative Prospectus on the PublicOffering to Acquire Shares made by Telefónicafor all the shares of Terra Networks, S.A.,registered on the official registries of theNational Stock Exchange Commission on 19

June 2003.

• Annual Informative Prospectus in 20F format,which was registered on 30 June 2003, at theU.S. Securities Exchange Commission.

• The Annual Informative Prospectus IAN,registered on 16 July 2003, at the Comissao deValores Mobiliários (CVM) in Brazil.

• The Annual Informative Prospectus S.R.S. whichwas registered on 30 June 2003, at the JapanSecurities and Clearing Corporation and at theTokyo Stock Exchange.

• The brief Informative Prospectuses on twocapital increases against freely availablereserves. Due to the two capital increases thatthe Board of Directors of Telefónica agreed toexecute during financial year 2003,the relevant Prospectuses were registered onthe official registries of the NationalStock Exchange Commission on capitalincrease, the first of them registered on16 January 2003, and second on 27 February2003.

• The brief Informative Prospectus on thePromissory Note Programme of Telefónica, thatwas registered on the official registries at theNational Stock Exchange Commission on 18

December 2003.


06


Lastly, one must point out that the policy oftransparency and information of the TelefónicaGroup has been backed up by the followinginternational awards:

• Best performance in European InvestorRelations in telecommunications (2003,Thomson Extel Survey).

• Best web prize of the Ibex 35, awarded by themagazine Dinero, on 5th February 2003.Thisprize was awarded on the basis of a studymade in collaboration with Look & Enter, acompany specialised in Internet marketingand communication.

• Prize for Financial Information, granted byPricewaterhousecoopers (PWC) that preparesthe annual “Value Reporting Review”.

• Special Mention “Best Financial MediaRelations”, granted by IR Magazine EurozoneAwards 2003, as one of the companies thatmaintains the best relations with the financialmedia.

• Third position in the Spanish CorporateReputation Monitor, 2003 edition, prepared bythe Analysis and Research Institute at theComplutense University of Madrid.

6.2.4 Information provided throughthe web pageDuring 2003, important work was carried outon reviewing the Telefónica web page, as torelevant information for shareholders andinvestors, creating a new section specificallydedicated to matters of CorporateGovernance, restructuring the pre-existing information and includingnew content.

It is also necessary to point out that theTelefónica web page contains all theinformation required by “Ministerial Order3722/2003, of 26

th December, on the annualreport on corporate governance and otherinstruments of information of listed stockcompanies and other entities”, published last 8

th

January.

This page received a total of 680,000 visitsduring 2003.The following information may beaccessed on it:

Content related to corporate governance

• Relevant documentation: Articles ofAssociation, Regulations of the Board ofDirectors, Internal Codeof Conduct in, AnnualReport on Corporate Governance for financialyear 2002, etc.

• Shareholding Structure: most significantstakes and number of shareholders.

• General Shareholders’Meeting years 2001,2002 and 2003: resolutions passed,quorum and results of voting, speechesand presentations made.

• The Board of Directors: duties, composition andthe number of Telefónica’s shares held by theDirectors.

• Committees of the Board of Directors:duties and composition of each of them.

• The Management Team: identification of themembers of the top management ofTelefónica and the top executives of its mainlines of business.


• Remuneration policy: Information onremuneration of the Directors, executives andon remuneration schemes linked to theevolution of existing shares.

Content in financial and stock exchange matters

• Financial information: Annual reports from 1998,and quarterly results of the last three years.

• Official Records: Informative Prospectusesregistered before the different regulatorybodies of the stock markets where theCompany is listed.

• Corporate presentations: most relevant corporatepresentations made over the last two financialyears,including presentations on agreementsand acquisitions,and the presentations made atthe last Investor Conferences.

• Stock Exchange Information: the stockexchange and listing data of thesecurities in real time, on the dividends,presence on the stock exchanges, pondering ofthe main indexes, capital increases made, etc.

• Market opinion: consensus of analysts onTelefónica, comparing target prices, lastreports published.

• Other relevant information: financial calendarof the Company, corporate profile, basicindicators, etc.

General information on the business

• Information on the structure and stakes in theTelefónica Group.

• Press releases issued during the financial year.

• Communications of Relevant Facts and otherdisclosures during the financial year.

• Corporate social liability.

Lastly, one must mention that all the informationon the web page – except for some specificdocuments – is provided in three languages:Spanish, Portuguese and English.

TABLE 6MARKET DISCLOSURE

Type of information Number

Investment and divestment operations of a strategic nature 12

Presentations of quarterly results 10

Changes in the Board of Directors and other governing bodes and relevant information on Corporate Governance 6

Presentations on the Company 9

Information on strategy, objectives and strategic agreements 8

Law suits, litigation, relevant penalisation proceedings 1

Other communications of relevant facts 20

Total 66


06



07Degree of compliance withthe corporate governancerecommendations


07

Degree of compliance with the corporate governance recommendations

07.01 TELEFONICA, S.A.

The following is an analysis of the degree ofcompliance with the most relevantrecommendations on Corporate Governance atan international level, including those made atSpanish level, in the Report published by the“Special Commission to Study an Ethical Code forthe Boards of Directors of the companies:Governance of listed companies”, of 26thFebruary 1998 (Olivencia Code) as well as theReport by the “Special Commission to encouragetransparency and security on the markets andlisted companies”, of 8th January 2003 (AldamaReport).

Principles of Corporate GovernanceExistence of internal provisions to regulate thesystem of corporate governance.

The fundamental rules of corporate governanceof Telefónica are set forth in its Articles ofAssociation and in the Regulations of the Boardof Directors.The Regulations of the Board ofDirectors, as fundamental rules for corporategovernance of the Company, determine theprinciples of action of the Board of Directors,regulate its organisation and operation and setthe rules of conduct of its members.

The Board of DirectorsExpress undertaking by the Board of Directors ofthe general duties of supervision, as anindelegable task, and establishment of acatalogue of matters reserved for its hearing.

The Regulations of the Board of Directorsbasically configure it as a body to supervise andcontrol the activity of the Company, delegatingmanagement of its ordinary business upon theexecutive bodies (single person or collegiate) and

the management team. Moreover, as establishedin these Regulations, the Board binds itself todirectly exercise certain responsibilities (generalstrategies, own portfolio policy, implementationand monitoring of internal control systems, etc.)

Composition of the Board of DirectorsOperative size of the Board according to thecharacteristics of the Company.

The Articles of Association of Telefónica foreseethat the Board of Directors is comprised of aminimum of five and a maximum of twentymembers.The Board of Directors of Telefónica isnow comprised of nineteen Directors.

Due to the complexity of the Telefónica Group,the significant number of companies comprisingit, the variety of the sectors in which it performsits activities, its multinational nature, as well asits economic and corporate relevance, the size ofthe Board of Directors is considered adequateand suitable to achieve effective, operationalfunctioning in all cases.

Integration of a reasonable number ofindependent Directors on the Board.

Majority of Directors external or non executivedirectors out of the number of executive Directors.

Multinational presence on the Boards of Directors.

Considering the present composition of thepresent Board of Directors of Telefónica, theprinciples that govern this composition –established in the Regulations of the Board –, onemay conclude that: (a) it has a significantnumber of independent Directors (eight); (b) theexternal Directors (proprietary and independent)form an ample majority over the executive ones


(fourteen to five); and, (c) it has a very significantshare of independent Directors, who are inmajority in relation to the proprietary ones (eightto six).

On the other hand, due to the multinationalnature of the Telefónica Group, the Board ofDirectors of the Company has three foreignDirectors.

Operation of the BoardMeetings of the Board: frequency, encouragingparticipation by all the Directors, care in draftingthe minutes and annual evaluation of theefficiency of the Board.

To ensure adequate operation of the Board, itsmeetings are held at least once a month,according to a pre-set calendar, in which thematters on the Agenda will be analysed anddiscussed. It will be directly supervised by theSecretary who shall especially ensure that theminutes drafted provide a true record of thematters dealt with and, when appropriate, theresolutions passed.

The Company ‘s CEOIf the Board opts for the formula of accumulatingboth the Chairman and the CEO positions in asingle person y, the Company shall adopt thenecessary precautions to reduce the risks ofconcentration of power in a sole person.

The Chairman of the Board of Directors is theCEO of the Company, although according to theterms of the Regulations of the Board ofDirectors, his actions must comply at all timesto the criteria and directives set by the GeneralShareholders’ Meeting and by the Board ofDirectors and by the Committees reporting toit. Likewise, all resolutions or decisions of

special relevance to the Company mustpreviously be submitted for approval by theBoard of Directors or relevant controlCommittee. Moreover, it is necessary to havethe reports and proposals by the differentCommittees of the Board to pass certainresolutions. It is important to point out that theChairman does have a deciding vote on theBoard of Directors.

Secretary to the Board of DirectorsRelevance of the figure of the Secretary to theBoard, reinforcing his independence andstability, and emphasising his duty to ensure theformal and material legality of the actions bythe Board.

The Secretary to the Board has Director status, inorder to reinforce his authority on the Board.Pursuant to the terms of the Regulations of theBoard, the Secretary has the essential mission ofcaring in all cases for the formal and materiallegality of the actions by the Board and toguarantee that its procedures and rules ofgovernance are respected.

The Executive CommitteeExistence of an Executive Committee with asimilar composition to that of the Board andrelations between both based on a principle oftransparency.

The relations between the Board of Directors ofTelefónica and its Executive Committee arebased on a principle of transparency, so theBoard has full knowledge of the matters dealtwith and the decisions made by this Committee.According to this, those matters are alwaysincluded as a point on the Agenda to be dealtwith at the next meeting of the Board ofDirectors.


07


The Board of Directors sub-committeesExistence of Board sub-committees comprisedexclusively by external Directors, in particular,with responsibility on audit and control matters,and on matters related to appointments andcompensation.

The Board of Directors of Telefónica has the sub-committees recommended by the OlivenciaCode: an Audit and Control Committee, and aNominating, Compensation and CorporateGovernance Committee, with the competenciesthat Code attributes them. Also according to thisone, these Committees are comprised exclusivelyof external Directors.

Besides, the Board of Directors considered itconvenient to constitute three additional sub-committees: the Regulation Committee, theHuman Resources and Corporate ReputationCommittee, and the Service Quality andCustomer Service Committee. Moreover, in 2003,at its meeting on 26

th February, the Board ofDirectors of the Company resolved to create asixth Committee, the International AffairsCommittee.

Thus, on the date of issue of this Report, there aresix Board sub-committees in the Company.

The DirectorsMeasures to guarantee that the Directors havethe necessary information in time and form.

The Company takes the necessary measures toensure that the Directors have sufficientinformation enough time in advance, specificallyelaborated and aimed at preparing the sessionsof the Board and its Committees, without anyexcuse for non fulfilment, based on theimportance or reserved nature of the

information – apart from absolutely exceptionalcircumstances.

Formal, transparent procedure to select Directors,based on a proposal by the AppointmentsCommittee.

The proposals of appointments of Directorsalways comply with the terms of the Regulationsof the Board and are preceded by the relevantfavourable report by the Nominating,Compensation and Corporate GovernanceCommittee.

Existence of regulations that establish theobligation of the Directors to decide in cases thatmay negatively affect the operation of the Boardor the credit and reputation of the Company.Establishment of an upper age to hold office as aDirector.

The Regulations of the Board make it obligatoryfor Directors to resign in cases that maynegatively affect the operation of the Board orthe credit and reputation of the Company. On theother hand, pursuant to the Regulations of theBoard, the Directors must hand in theirresignation and formalise the relevantresignation when they reach the age of seventy(70). Executive Directors shall resign fromexecutive office at the age of sixty five (65),although they may remain as Directors, if theBoard so decides.

Regulation of the obligations arising from thegeneral duties of diligence and loyalty of theDirectors considering, in particular, thesituation of conflict of interest, the duty ofconfidentiality, taking advantage ofbusiness opportunities and the use of corporateassets.


According to the recommendations made in theOlivencia Code and in the Aldama Report, theRegulations of the Board provide a specific titlefor this, formed by twelve articles, to describe therange of rights and obligations of the Directors.This title details the details that arise from theobligations of diligence and loyalty of theDirectors, considering, in particular, the situationof conflicts of interest, the duty of confidentiality,in particular, the situation of conflicts of interest,the duty of confidentiality, taking advantage ofbusiness opportunities and use of corporateassets.

Recognition of the rights of Directors to obtaininformation and establishment of channels toexercise them.

The Regulations of the Board formally recognisethe rights of all Directors to gather and obtainthe necessary information and advice to fulfiltheir duties of supervision, and establish theappropriate channels to exercise that right,enabling even resorting to external expertsunder special circumstances.

The Director compensation policy is adequate andfits the criteria of moderation, which must beproposed, evaluated and reviewed by theCompensation Committee, and detailed,individual information must be provided.

As to the policy of retribution of the Directors, itis proposed, evaluated and reviewed by theNominating, Compensation and CorporateGovernance Committee, and complies withcriteria of moderation.The Company providesannual information on the compensationreceived by the holders of offices or posts on theBoard. Moreover, in line with the Aldama Report,the external Directors shall not participate in any

compensation scheme linked to the listed valueof the shares.

Measures to extend the duties of loyalty to thesignificant shareholders and top management.

Lastly, the duties of loyalty to the significantshareholders is extended, foreseeing that theBoard reserves the right to examine andauthorise any transaction between the Companyand any of its significant shareholders. Under nocircumstances will the transaction be approvedwithout a prior report by the Nominating,Compensation and Corporate GovernanceCommittee evaluating the operation from thepoint of view of equal treatment of theshareholders and their conditions, which mustbe those of the market. On the other hand, and inline with the Aldama Report, the Company hasextended the obligations arising from the dutyto loyalty of the top management, through whatis set forth in the Internal Rules of Conduct inmatters of conflict of interest.

Relations of the Board with the marketsQuick, precise, reliable information for themarkets, and establishment to that end ofprocedures and controls for communication ofthe information within the Company.

Periodic financial information prepared accordingto the same principles and professional practicesas the annual accounts and verified by the AuditCommittee.

Duty of information and transparency, (especiallyin matters of corporate governance).

The Regulations of the Board assign severalarticles to regulating the channels throughwhich relations are established between the


07


Board of Directors and the shareholders of theCompany so it may thus ensure the greatestpossible transparency in those relations.

Beyond the requisites set in the by-laws in force,the Board of Directors of Telefónica, hascommitted itself to providing the markets withprecise, reliable information. In particular, theperiodic financial information of the Company,just as expressly recorded in the Regulations ofthe Board, is prepared according to the sameprinciples and professional practices as theannual accounts, and before being disclosed, isverified by the Audit and Control Committee,according to the functions that Committee isattributed.

Moreover, in line with the recommendations ofthe Aldama Report, the Company provides themarket all the information that may beconsidered relevant to the investors, in asymmetrical, equitable manner. According to theobligations established under the new FinancialAct, the Company issues communications ofrelevant information to the National StockExchange Commission, prior to its diffusion byany other means, as soon as the fact is known, oras soon as the decision has been taken, or theagreement or contract is signed with the thirdparties concerned.The Company ensures that itscommunication of relevant information is true,clear and complete at all times.

In matters of transparency in corporategovernance, and in line with therecommendations put forward in the AldamaReport, as during last financial year 2002,Telefónica has prepared a specific Report oncorporate governance. In the same line, theCompany has set up a web page on CorporateGovernance, that includes, among others, the

content suggested by the Aldama Report(Articles of Association, internal regulations ofthe Company, periodic financial information,composition of the Board of Directors and itssub-committees, etc.).

Relations of the Board with the externalauditorsEstablishment of measures to monitor theindependence of the external auditors.

Through the Audit and Control Committee, theBoard of Directors has established a stable,professional relation with the Accounts Auditorto the company, with strict respect for itsindependence, in addition to fulfil therecommendations to that end in the OlivenciaCode. According to this, the Audit and ControlCommittee monitors situations that may be arisk to the independence of the External Auditorsof the Company and, specifically, supervises thepercentage of fees it is paid in relation to thetotal revenue of the audit firm.

Lastly, it reports on the Company annual report,pursuant to the legal requisites in force, on thefees paid to the External Auditor to the Companyincluding those related to non-audit services.

In fulfilment of the legal requisites establishedby the United States by-laws on this matter, andin line with the Aldama Report, the audit andrelated services provided by the External Auditorto the Company must have prior approval by theAudit y Control Committee.

The General Shareholders’ MeetingMeasures that make the mechanism to delegatevotes more transparent and encouragecommunication by the Company with theshareholder.


In order to provide for and make it possible forany shareholder to exercise the right toinformation, the proposals of resolutionssubmitted for approval by the Meeting and thedocuments and required reports related to themare made available to the shareholders, on theterms and conditions of the Stock Company Act,from when the announcements calling theMeeting are published.

Likewise, the Company attends, as far as possible,to requests for information related to mattersincluded on the Agenda of the GeneralShareholders’Meeting that are raised by anyshareholder, in the days prior to holding theMeeting, as at the actual Meeting, the agenda ofwhich expressly includes a turn for theshareholders to speak, during which all theshareholders attending the Meeting who sowish may express themselves, and theirinterventions will always be replied to by theChairman of the Company.

As to the right to attend and vote at the GeneralShareholders’Meeting, the Company facilitatesexercise of those rights as much as possible,always within the framework set in theapplicable laws in force and the Articles ofAssociation, especially that of representation ofshareholders at the General Shareholders’Meeting, which may be granted in favour of anyperson, although not a shareholder.

According to the demands of the Spanishmercantile laws, the documentation related tothe points on the Agenda are available to all theshareholders at the Company registered office,and they may apply to have it sent to them freeof charge.The same information is also availableto all shareholders on the Company web page.

07.02 OTHER COMPANIES IN THE TELEFÓNICA GROUP

In addition to Telefónica, the company thatheads the Group, the shares of which are listedon 9 different markets, the Telefónica Group isformed by another 21 listed companies, some ofwhich, in addition to being present on the localstock exchanges, are listed in the United States.

The following is a list of the listed companies ofthe Telefónica Group, showing the markets onwhich its shares are traded (see Table 7, OtherCompanies in the Telefónica Group).

The corporation has encouraged the adoption ofthe best Corporate Governance practices withinthe Group, regardless of the specific requisites oneach market.Thus, all the listed companies in theTelefónica Group now have common minimumstandards for corporate governance that arefulfilled across the board (see Table 8, Commoncorporate governance minimum standards).


07


TABLE 7OTHER COMPANIES IN THE TELEFÓNICA GROUP

Company Local Market United States

SpainTelefónica Móviles, S.A. Spain NYSETerra Networks, S.A. Spain NASDAQTelefónica Publicidad e Información, S.A SpainArgentinaTelefónica de Argentina, S.A. Buenos Aires NYSETelefónica Móviles Argentina, S.A. Buenos AiresTelefónica Holding de Argentina, S.A. Buenos AiresCompañía Internacional de Telecomunicaciones, S.A. Buenos AiresTelefónica Data Argentina, S.A. Buenos AiresBrazilTele Sudeste Celular Participaçoes, S.A. Sao Paulo NYSETele Leste Celular Participaçoes, S.A. Sao Paulo NYSECelular CRT Participaçoes, S.A. Sao PauloTelesp Celular Participaçoes, S.A. Sao Paulo NYSETele Centro Oeste Celular Participaçoes, S.A. Sao Paulo NYSETelecomunicaciones de Sao Paulo, S.A. Sao Paulo NYSETelefónica Data Brasil Holding, S.A. Sao PauloChileCompañía de Telecomunicaciones de Chile, S.A. Santiago de Chile NYSECompañía de Teléfonos de Chile Transmisiones Regionales, S.A. Santiago de ChilePeruTelefónica Móviles Perú Holding, S.A.A LimaTelefónica Data Perú Holding, S.A.A LimaTelefónica de Perú, S.A.A Lima NYSEEl SalvadorTelefónica el Salvador El Salvador

TABLE 8

COMMON CORPORATE GOVERNANCE MINIMUM STANDARDS

Composition of the Board of Directors Majority of external or non executive Directors in relation to executive Directors.Existence of a reasonable number of independent Directors on the Board.Operation of the Board of Directors.Existence of operating rules of the Board (”Reglamento del Consejo”in Spain).Calendar. Minimum number of meetings.Regulation of the rights and obligations of the Directors5.Board of Directors sub-committees.Existence of an Audit and Control Committee.Existence of a Nominating, Compensation and Corporate Governance Committee6.Comprised exclusively of non executive Directors.Transparency.Shareholder customer service.Information on corporate governance provided annually in an Annual Report or Specific Report.Web Page on Corporate Governance (including Relevant Facts)7.Others.Control systems for the financial-accounting information.Internal Code of Conduct for Securities Markets Issues.

(5) Regulation contained either in an internal rule of the Company, or in the local by-laws.(6) All the Spanish listed companies in the Group have this Committee. This practice will gradually be spread to othercompanies in the Group, according to the specific characteristics of each of them.(7) In the case of the Spanish listed companies in the Group, the content in matters of corporate governance in these pages isadapted to the requirements of Ministerial Order 3722/2003, of 26

th December, on the annual report on corporate governanceand other instruments providing information on listed stock companies and other entities.

annual reporton corporate governance 2003 telefónica s.a

Documents