Telefónica stock options controversy

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A major controversy broke out in Spain in late 1999, when it emerged that 100 executives of the Telefónica telecoms company will immediately receive ESP 72 billion under a stock options programme approved in February 1997. The shareholders' meeting of the company held in April 2000 confirmed that these stock options will be given to the executives immediately and launched a new programme that will distribute approximately ESP 420 billion among the company's 90,000 permanent workers in four years' time.

In late 1999, it was announced that the Telefónica telecommunications company would distribute about ESP 40 billion in stock options among 100 executives in February 2000. The news soon came to the forefront of the political and social debate. Some claim that it is one of the greatest scandals in the past few years from a legal, political and ethical viewpoint; others claim that it is simply a legitimate initiative by a private company that can only be regulated by legal or fiscal measures. The dividing line between the two camps is not as obvious as it might seem. Of course, the detractors include all the opposition parties and the trade unions, and the defenders include the management of Telefónica and the People's Party (Partido Popular, PP) government. Significantly, however, prominent personalities have also criticised Telefónica severely, such as José María Cuevas, president of the CEOE employers' association, Enrique Fuentes Quintana, president of the Academy of Moral and Political Sciences and a former Union of the Democratic Centre economics minister, or José Barea, a former secretary of state and former head of the Budget Office of the People's Party government. Even the Prime Minister, José María Aznar, has attempted to distance himself from this controversy by recommending that for ethical reasons the chair of Telefónica should not take up the stock options to which he is entitled.

The facts

In February 1997, the board of Directors of telefónica approved a programme of stock options in the company for 100 executives, in order to ensure their fidelity to the company. The only requirement for exercising this option was that the managers should continue in employment with Telefónica until February 2000, at which point they would be able to purchase company shares at a price even lower than the initial share price when the company was floated on the stock exchange in February 1997. The spectacular profit that this programme gives the executives is due to this privileged price and to the sharp increase in the value of Telefónica shares, which has been multiplied in the past three years. The initial news placed the amount involved at ESP 40 billion, but when the time came to carry out the operation it had increased to ESP 72 billion due to the great increase in the value of the company shares. In short, in February 1997 the company invested around ESP 2.7 billion to reward its executives (an average of ESP 27 million per person) and the value of the stock options is now ESP 72 billion (an average of ESP 720 million per person).

The controversy

Telefónica is neither the first nor the only company to use stock options to reward its executives, although this practice is less widespread in Spain than in other European countries, and far less than in the USA. Therefore, the issue is not so much whether stock options should be used, but how they have been used in the specific case of Telefónica.

The objections concern the perceived lack of transparency and alleged illegality of the programme. The critics point to the lack of information offered by the board of directors of Telefónica to the shareholders' meeting, although the company claims that the meeting has been informed at all times. It has also been argued that it is illegal to include members of the board of directors, such as the president of Telefónica, José Luis Villalonga, in this programme because this is only legal if the statutes of the company explicitly establish the same, which is not the case at Telefónica. Many experts and parts of the business world agree with these objections, and argue that the management should show greater transparency towards the shareholders, as the legal owners of the company.

The trade unions and left-wing parties also criticise the amount of the incentives: ESP 72 billion between 100 people seems absolutely disproportionate and "politically and socially incorrect", in a company that has for years been reducing its workforce and outsourcing in permanent conflict with the workers' representatives (ES9907243N) (about 20,000 workers have been made redundant). For these critics, the programme also seems rather unethical in a public company like Telefónica that has recently been privatised and still exercises a telecommunications monopoly (mainly de facto) in certain activities because the liberalisation of the telecommunications sector is still incomplete (ES9901294F). It is even debatable whether at the time when the stock options programme was approved Telefónica had been totally privatised.

Legal amendments and new agreement

The news of the programme became public in late 1999, coinciding with the parliamentary debate on the Law of Accompaniment of the State Budget. Although the People's Party government has attempted to stay outside the controversy, claiming that a programme with these characteristics is legal and legitimate in a private company, it has been forced to seek agreements with other parliamentary groups to improve the fiscal and legal regulation of stock options.

Amid great controversy, two urgent amendments were passed unanimously by the Congress of Deputies. The first toughened the fiscal conditions for this type of income: incentives of over ESP 7.5 million are now liable to a tax rate of 48% (the maximum rate) instead of the previous 30%. The second was aimed at covering the legal loophole in this type of programme by making it compulsory for stock options to be known and approved by the shareholders' meeting of the company.

However, these amendments have not put an end to the dispute – quite the opposite. The opposition, which approved these amendments like the rest of parliamentary groups, admitted on the following day that it had made a mistake. The tax amendment may harm other groups that work atypically, because it is not specifically aimed at the variable income of executives or other salaried staff. What is more serious is that, rather than covering the legal loophole, the legal amendment legalises the action of the board of directors of Telefónica. For the stock option to be legal, it is now sufficient for the shareholders' meeting to ratify it after the event.

Meanwhile, Telefónica has continued to consolidate its business position by signing an alliance with the main banking group in Spain, and postponed the shareholders' meeting to approve the stock options until after the general elections on 12 March 2000.

The management of Telefónica has also now agreed with the CC.OO and UGT trade unions a new programme of stock options for all permanent workers who are not already included in other programmes. Around 90,000 workers will benefit from the programme and be able to purchase a given number of shares according their wage scale. If the market forecasts are fulfilled, in four years they will receive the equivalent of one year's net wages. It is calculated that a total of around ESP 420 billion will be handed out. The trade unions consider that the agreement with the management does not contradict their harsh criticism of the management programme, which was based on the lack of transparency and the disproportionate amount of the benefits. However, there is no doubt that the agreement has made a significant contribution to moderating the level of dispute. At the shareholders' meeting held on 8 April, both programmes were ratified and only the minority shareholders severely criticised the actions of the management.


It is difficult to explain why a programme of incentives for executives should occupy the forefront of political and social debate for several months. What is being questioned is not its legality: the recent massive dismissals at Michelin (EU9911210N) after it obtained spectacular profits were also legal, but also caused shock and rejection in France (FR9910113F). Though the Telefónica measures are legal, there is some doubt about their legitimacy. Even from a strict viewpoint of business efficiency, it is unlikely that a programme of these characteristics, exclusively linked to the market value of shares, will do any more than guarantee the fidelity of the management for three years. When the stock options matured, a large number of executives left the company. However, this is not the only problem: questions also arise about the privatisation of Telefónica, which has had a high cost in job losses and has produced high profits for a small number of executives. The new agreement signed between the management and the trade unions has helped to balance out the situation, but only for the workers who are still with Telefónica on a permanent contract. This should not mean that Telefónica will have carte blanche in its future operations. (María Caprile, CIREM Foundation)

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