Drawing on academic research such as David Yermack's 1996 Higher Valuation of Companies with a Small Board of Directors, evidence suggests a correlation between smaller boards and better company performance. That holds true in this case, with the worst performing bank in terms of earnings per share growth between 1995 and 2005--National Australia Bank--also having the largest board during that period.

Conversely, Westpac during its disastrous period in the early 1990s when it recorded a massive loss of A$1.6 billion ($1.2 billion) due to bad debts in Australia's property markets, cut its board size by almost one-third.

While the reasons for the reduction in bank board size are unclear, the data does support the notion that smaller board companies tend to outperform larger board firms--the smaller banks with around seven or eight directors generally performed better than the larger board banks.

Indeed, earnings per share growth between the 1980s and 1995 for smaller banks such as Bendigo Bank (12.2 percent), Adelaide Bank (177 percent), Suncorp-Metway (120.2 percent), Bank of Queensland (60.0 percent) and St. George Bank (57.9 percent) had all outperformed the limited earnings per share growth information for large capital banks including Australia and New Zealand (minus 10.8 percent) and Westpac (minus 11.6 percent).

The study also found that bank boards became more independent throughout the sample period, with all boards increasing independence levels by at least 50 percent by 2005. In the 1980s, many banks had a substantial number of shareholder-nominated directors on their boards, with the highest being Bank of Queensland with five affiliated directors representing its dominant shareholder. By 2005, however, none of the studied banks had directors representing a dominant shareholder.

This particular change reflects in part the transformation of small building societies--local and regional Australian financial institutions that are somewhat akin to U.S. credit unions--into large publicly listed deposit-taking institutions. Examples of this include the Co-operative Building Society of South Australia's conversion into Adelaide Bank, St George's Co-operative Building Society change into St. George Bank, and the Bendigo Building Society's transformation into Bendigo Bank

Meanwhile, compensation for bank executives has increased exponentially since the 1980s. The highest paid executive in the 1980s was Bob Joss at Westpac, who received approximately A$1.94 million ($1.48 milion) in annual compensation. In 2005, this amount increased to A$7.5 million ($5.7 million) for current Westpac CEO David Morgan. Overall, CEO pay grew at the banks studied grew between 90.1 percent and 392.6 percent from the 1980s to 1995. From 1995 to 2005, pay increases between 78 percent and 721 percent were evidenced, with the highest at Suncorp-Metway.

The rise outstripped the increase in the consumer price index over the same period, with CPI growing by only 53.7 percent between 1980s and 1995, and 27.7 percent between 1995 and 2005. The pay increases also outpaced increases in profitability. From the 1980s to 1995, basic earnings per share grew 62.1 percent at National Australia Bank, while CEO pay soared 392.6 percent. At Westpac, CEO pay increased 234.5 percent, while there was an 11.6 percent decrease in earnings per share growth.

The trend from 1995 to 2005 was similar, with National Australia Bank again increasing its CEO's remuneration by 344.8 percent, but the bank was able to simultaneously drive earnings per share growth by just 78.7 percent. The closest link of the two variables is evident at Adelaide Bank, where modest increases in CEO remuneration of 167.5 percent and 78 percent from the 1980s to 1995 and 1995 to 2005, respectively, were accompanied with increases in earnings per share of 167.5 percent and 110.1 percent over the same periods.

The marked rise in pay--particularly over the most recent period studied--can in part be attributed to the mandatory disclosure of option values beginning in 2002, which served to inflate 2005 figures. Moreover, the use of options as a component of pay was nowhere near as prevalent in the 1980s in Australia as it is today. It is noteworthy that the two longest-serving bank CEOs in the survey--Robert Hunt of Bendigo Bank and Barry Fitzpatrick of Adelaide Bank--received the lowest total remuneration, although both banks are small relative to others in the survey.

Executive pay increases in the Australian banking industry in the past 20 years has attracted considerable attention from shareholders and others, and analysts predict it may only be a matter of time before boards find it increasingly difficult to justify such rewards.