Relations between Mourinho and Valdano, a former Real player and coach, broke down soon after the Portuguese arrived from Inter Milan at the end of the 2009/10 season.
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President Florentino Perez eventually decided to get rid of Argentine Valdano, favouring Mourinho and giving him more wide-ranging influence as the club seek to end the domination of arch rivals Barcelona and claim a 10th European crown.
In a brief statement on their website on Friday, Real said Mourinho's new title was rubber-stamped at a board meeting the previous day.
In previous stints as manager of Chelsea and Inter, Mourinho was used to more power and a freer rein than he was initially given at Real.
According to media reports, he also harboured a grudge over a newspaper column Valdano wrote several years ago criticising his tactics at Chelsea.
Mourinho has been revamping Real's squad since his arrival in the Spanish capital, bringing in players like compatriot Ricardo Carvalho and German pair Mesut Ozil and Sami Khedira for his first season in charge.
Since the end of the 2010/11 campaign, when Real's only silverware was the domestic cup, he has added another Portuguese, defender Fabio Coentrao, and Turkish midfielders Nuri Sahin and Hamit Altintop among others.
