Anthony Hilton: RBS shows how boards are often in the dark about what's really happening

The great and the good of the City got together earlier this autumn to launch an initiative as part of the effort to rebuild trust in financial services. It was all about the board making it a priority to do what was right for the customer, creating a culture and business model which reflected those values and then embedding that culture throughout the organisation.

It struck me at the time that noble though these sentiments are, the plan could easily founder because so few boards have any real idea about what goes on at the sharp end in their business. And because nobody tells them the unvarnished truth, it is impossible for them to find out.

This week came living proof of that. Back in July the Royal Bank of Scotland (RBS) commissioned Sir Andrew Large, a former deputy governor of the Bank of England, to conduct an objective review of the way it handled lending to small and medium-sized enterprises (SMEs) after yet another barrage of criticism from Westminster and complaints from the public.

His report was published yesterday and rarely can there have been such a publicly admitted catalogue of woe. While the board was setting higher targets for SME lending, the people in the front line were being told to tighten credit standards to make it harder to borrow. The bank had hardly any staff left who understood how to assess the risks of business – having for years only lent against property. Naturally with their own jobs at stake they erred on the side of caution. Management was fragmented, decision making was slow, the whole business was excessively complex. Basically, they did not seem to be getting anything right.

The RBS board had expected a report which would tell it to tweak one or two things. Instead it has been told to overhaul the way it operates. To say the bank was shocked is to put it mildly because the reaction shows it had no idea things were this bad. But that surely is the lesson for big business in general. How many other large firms have similar, entrenched problems but just don't know it?