TELECOM ITALIA GROUP

GROUP 1 – YELLOW CLASS

Alexandra Denisevich
Andre Luiz Gomide Papa
Bradley Lundquist
Giuseppe Parotti
Ricardo Rodriguez Moreno
INDUSTRY / ITALIAN MARKET
 Rigid cost structure (TI reported ratio od cash costs to revenues of 79% in line with the industry average) has been eating
into profitability and producing sharply declining operations margins.
 After a series of M&A deals (that characterized the industry on a global level in the past 5-7 years) the concentration of
competition has reached HHI of 2843 with 5 major active players (TIM, in the mobile sector excluding MVNO and circa
1.3 times higher for the fixed line (TI, Wind-Infostrada, Fastweb, Vodafone & BT Italia).
 Avg penetration rate well above 100% (159% in mobile due to multiple SIMs and 64% in broadband)
 MNP facilitated customer acquisition and increased churn rates
 EU Commission since 2007 pushed for contained both in Voice and data, falling ARPU
 Alternatives like VoIP, social media chats, other web based communication widgets and MVOs leaving the traditional
telco players shifting from service providers to capacity providers.
 The broadband remains the most evident potential source of expansion and the copper roll out has been taking place in
Italy in the past years but with a speed and scope far behind that of its competitors in Central Europe. The network
bottlenecks still pose a serious challenge for the “new comers” as well the incumbents
THE BUSINESS

 Telecom Italia Group operates in different markets through 4 business units

 The Domestic Business Unit operates as the consolidated market leader in the sphere of voice and data services on fixed
and mobile networks for final retail customers and other wholesale operators. In the international field, the Business Unit
develops fiber optic networks for wholesale customers (in Europe, in the Mediterranean and in South America).
 The Brazil Business Unit (Tim Brasil group) offers services using UMTS and GSM technologies as well as fiber optic
data transmission and residential broadband services.
 The Media Business Unit operates in the management of analog and digital broadcasting networks and accessory
services of television broadcasting platforms.
 Olivetti operates in the sector of office products and services for Information Technology. It carries out Solution Provider
activities to automate processes and business activities for small and medium-size enterprises, large corporations and
vertical markets. The reference market is focused mainly in Europe, Asia and South America.
ECONOMIC PERFORMANCE

(mil Euro) 2013 2012 2011 2010 2009

Revenues 23,407 25,759 26,772 26,781 26,894

EBITDA 9,540 10,525 11,138 11,208 11,115

EBIT 2,718 1,709 (1,190) 5,748 5,493

Profit (loss) (238) (1,277) (4,366) 3,572 1,596

SHAREHOLDERS’ STRUCTURE

 Telecom is indirectly controlled by Telefonica S.A. through a 66% holding in Telco SpA

Telecom Shares Ownership (2013) Telco Shares Ownership (2013)

0% 7% 7%
16% 22%
4%

1%
4% 1% 19%

52% 66%

Telco SpA Telecom Italia Group

Italian Institutional Investors Foreign Institutional Investors Shares
Italian Companies Foreign Companies
Other Italian Shareholders Other Foreign Shareholders
TELECOM GROUP STRUCTURE

Domestic Brazil Argentina*

Media Olivetti
*Executed agreement for the sale of Telecom Argentina
THE BOD – MEMBERS

Aldo Minucci Marco Patuano

Chairman MD & COO
Proposed by Telco Proposed by Telco

Tarak Ben Ammar Gabriele Galateri Gaetano Micciché Renato Pagliaro

Director Director Director Director
Proposed by Telco Committee: ARC Proposed by Telco Committee: EC
Proposed by Telco Proposed by Telco

Mauro Sentinelli Lucia Calvosa Massimo Egidi Jean Paul Fitoussi Luigi Zingales
Indipendent Director Indipendent Director Indipendent Director Indipendent Director Indipendent Director
Committees: EC CRC Committee: CRC Committee: ARC Proposed by Telco Committee: CRC
Proposed by Telco Proposed by Funds
THE BOD – ELECTION RULES

 The bylaws state that the Board of Directors shall consist of no fewer than seven and no more than nineteen
members, and be appointed on the basis of slates presented by shareholders who own at least 0.5% of the ordinary
share capital or other proportion required by Consob. By resolution nr. 18452 of 30 January 2013, Consob fixed
this percentage for Telecom Italia at 1%.
 Four fifths of the directors to be elected are chosen in the order that they appear on the slate that has obtained the
largest number of votes, with rounding downwards to a whole number in case of a fraction. 
 The remaining directors are drawn from other slates. The votes they obtain are subsequently divided by whole
numbers from one up to the number of the directors to be elected, and the quotients obtained are assigned to the
candidates on each slate in the order specified thereon. The quotients assigned in this way are set out in a single
slate in decreasing order, and the candidates with the highest quotients are elected.
THE BOD – THE COMMITTEES 1/2

 Executive Committee:
 monitor the operational performance of the Company and the Group;
 approve the Company's macro organizational arrangements, acting on a proposal from the Executive Directors;
 express its opinion of the budget and of the strategic, industrial and financial plans of the Company and the Group, as well as on transactions that, owing
to their nature, strategic importance, size or consequent commitments, will have a major impact on the business of the Company and the Group;
 perform other duties assigned to it by the BoD.

 Remuneration Committee:
 periodically evaluate the adequacy, overall consistency and actual application of the policy for the remuneration of directors and key management
personnel, also on the basis of the information provided by the managing directors; it shall formulate proposals to the Board of Directors in that regard;
 submit proposals or issue opinions to the BoD for the remuneration of executive directors and other directors who cover particular offices as well as for
the identification of performance objectives related to the variable component of that remuneration; monitor the implementation of decisions adopted by
the Board of Directors and verify, in particular, the actual achievement of performance objectives.
 oversee the succession plan for Executive Directors, and monitor the updating of the company management replacement lists, prepared by the Executive
directors;
 establish the procedure and period for the annual evaluation of the BoD;
 propose the criteria for allocating the total annual compensation established by the Shareholders' Meeting for the whole BoD.
THE BOD – THE COMMITTEES 2/2

 Control & Risk Committee:

 evaluate the correct application of the accounting principles, as well as their consistency for the purpose of the preparation of the consolidated financial
statements;
 express opinions on specific aspects relating to the identification of the main risks for the company;
 review the periodic reports of the internal audit function concerning the assessment of the internal control and risk management system, as well as the
other reports of the internal audit function that are particularly significant;
 monitor the independence, adequacy, efficiency and effectiveness of the internal audit function;
 request the internal audit function to carry out reviews of specific operational areas, giving simultaneous notice to the chairman of the Board of statutory
auditors;
 report to the BoD on the occasion of the approval of the annual and half-year financial report, on the activity carried out, as well as on the adequacy of
the internal control and risk management system
 provide high-level supervision related to corporate social responsibility, monitoring the consistency of the actions performed with the principles laid
down by the Code of Ethics of the Group and the values of Telecom Italia;
 monitor observance of the Company's corporate governance rules, the evolution of rules and best practice in the field of controls, corporate governance
and corporate social responsibility, also with a view to proposing updates to the internal practices and rules of the Company and the Group;
 perform other duties assigned to it by the BoD.
BOD’S STRATEGIC GUIDANCE

 examining and approving strategic, business and financial plans and the budget
 examining and approving strategic transactions
 verifying the adequacy of the organizational and administrative structure, with special reference to the internal control
system
 drawing up and adopting the Company’s corporate governance rules and establishing Group corporate governance
guidelines
 specifying the limits to delegated powers, the manner of exercising them and the frequency with which bodies with
such powers must report on the activity performed in exercising them
 nominating the Chairman and Chief Executive Officer of strategic subsidiaries
 assessing the overall performance of operations and periodically comparing the results achieved with those planned.
EXECUTIVES RENUMERATION

The compensation structure of Senior Executives and key managers with strategic responsibilities consists of the following:
 a fixed salary component, linked to the performance of the relevant markets, monitored continuously using benchmarks
developed by leading consulting companies;
 a variable salary component, both short and long term, characterized by:
 suitability to appreciate different levels of performance, both corporate and individual;
 ability to safeguard internal fairness;
 use of clear, solid and defined performance indicators, suited to ensuring that the interests of management are consistent
with those of investors;
 a non-monetary component, consisting of resources and services made available to the individual.
 Remuneration policies are differentiated according to a horizontal classification of the population, aimed at subdividing
resources according to their role and their individual value.
NON EXECUTIVES RENUMERATION

 110,000 euros gross per year for each Director (including the Chairman and excluding the Chief Executive Officer, who
expressly waived this remuneration);
 an additional 35,000 euros gross per year for each member of the Executive Committee (including the Chairman and excluding
the Chief Executive Officer;
 an additional 45,000 euros gross per year for each member of the Control and Risk Committee;
 an additional 20,000 euros gross per year for each member of the Nomination and Remuneration Committee;
 an additional 20,000 euros gross per year for the Director appointed to the Supervisory Board (Jean Paul Fitoussi); with effect
from May 2012, with the assignment to the Board of Statutory Auditors of the functions of supervisory body under Legislative
Decree no. 231/2000, this remuneration is no longer paid;
 an additional 90,000 euros gross per year for the Vice Chairman, in view of his responsibility for the internal control system.
Following the renunciation by the Vice Chairman of his mandate in respect of the operation of the internal control system, on 8
November 2012 the Board of Directors decided to divide the above compensation between the said Vice Chairman (taking
account of the costs arising from the acting legal representation which he performs under the bylaws) and Director Galateri, who
has been assigned the role of link between the Board and the control bodies which report directly to the Board.
CODE OF ETHICS

 The Code of Ethics is the apex of the entire corporate governance system: it is TI charter of values, and provides
the body of principles serving to ensure an ethically-oriented conduct of business based on transparency,
correctness and fairness. The Code of Ethics, gradually adopted by all the Group companies, sets the values of
business activity with reference to  the “addressees of the Code”: the members of the corporate bodies, the
management and workers of all Group Companies.
 Compliance with the Code must also be guaranteed by external collaborators and, where envisaged in the
company procedural system, by third parties that do business with the Group.  In the same way as all the other
corporate governance instruments, the Code of Ethics is constantly reviewed and compared with changes in the
regulatory framework, reference standards, and operational and market practices, with account also taken of the
feedback from the monitoring by Control Governance departments of the Group.
MAIN VALUES AND STAKEHOLDERS
Ethics and
Human
compliance
Resources
Competition

Health and
safety
Service
Excellence
Community
Communicatio
Communicatio
n
OWNERSHIP STRUCTURE – CONTROL ENHANCING
MECHANISMS

 Telecom is indirectly controlled by Telefonica S.A. through a 66% shareholding in Telco SpA which holds the
22.39% of Telecom, meaning that Telefonica actually owns only 14.78% of the company (so called «pyramid
structure»).
 Since the controlling shareholder controls the company with a limited investment, the risk of opportunistic
behaviours is increased.
 Moreover, the company is quite leveraged (net financial debt is about 2.8x EBITDA and 1.34x Equity) and this
gives to the controlling shareholder a further incentive to make risky investments, especially when paired with a
pyramid structure, since negative consequences affect mainly the company’s creditors.
OWNERSHIP STRUCTURE – VETO RIGHT OF THE MEF

 Telecom Italia has not issued securities which grant special rights of control. However, given the strategic
importance of the company for the Italian economy, pursuant to Law 474/1994, special powers have been granted
to the Minister of Economy and Finance.
 Such special powers, which do not depend on the ownership of shares, are the following:
 to object to the acquisition of shareholdings equal to or greater than 3% of the share capital represented by shares that confer
the right to vote in ordinary shareholder’s meetings if the Minister believes that the transaction is prejudicial to the vital
interests of the State;
 to veto, duly stating reasons relating to the actual prejudice caused to the vital interests of the State, the adoption of
resolutions for the dissolution of the company, transfer of the operations, merger, demerger, transfer of the registered office
abroad, change of company purpose and that cancel or modify said special powers.
GOVERNANCE STRUCTURE

 Telecom BoD seems to be in the hand of the controlling shareholder which proposed 9 directors over 11
(including 2 of the 5 indipendent directors). Even if the indipendent directors meet all the requirements to be
considered «indipendent», this is not a guarantee of actual indipendence (e.g. Enron case) and the risk of non-
indepence increases if he or she has been proposed by the controlling shareholder. Especially in a company that is
controlled with a low shareholding, the BoD composition should mirror the ownership structure.
 With respect to Directors compensation, it should be noted that the total annual compensation for the whole BoD
is decided by the shareholders’ meeting (then allocated by the Remuneration Committee) and this is in line with
the recent proposals of compensation policies «best practice».
SUGGESTED IMPROVEMENTS

 BoD appointment: since 8 current directors over 11 have been proposed by Telco, in order to protect minority
interests and decrease the risk of opportunistic behaviours, the bylaws should provide that at least half of the
directors (and all the independent directors) are chosen from slates proposed by shareholders other than the
controlling shareholder.
 BoD composition: given that 9 directors over 11 are Italian and there is only one woman, the BoD would benefit
from more diversity considering, in particular, that 55.97% of the company is owned by foreign investors.