By Costas Pitas and Paul Sandle
LONDON, March 14 (Reuters) - Britain's Co-operative Group , described as "ungovernable" by its chief executive as he quit this week, must reform or else face extinction, the group's senior independent director Paul Myners said on Friday.
The 170-year-old mutually owned-group, which includes food shops and funeral parlours and a stake in Co-op Bank, needs a smaller board with the skills to hold executives to account, said Myners, a former government minister and business grandee in a report commissioned by the group.
Unless it changes, the Co-op will "run out of capital to support its business," he warned.
The Co-op has been hit by a succession of scandals, with regulators finding a 1.5 billion pound ($2.5 billion) capital hole at its banking arm which eventually led the group to lose control of that business, and the bank's former chairman being arrested in an investigation into the supply of illegal drugs.
The Co-op has been "gravely damaged" by the scandals, Myners said, linking them partly to an unwieldy structure that reflects its foundation in local and regional co-operatives.
The Co-op's board is elected from regional boards and independent Co-operative Societies, and is entirely non-executive, meaning no director is involved in day-to-day operations.
Myners said he was "deeply troubled by the disdain and lack of respect" for the executive team he had witnessed from some members of the group board.
"Elected directors have simply not been up to their task of holding the Executive to account," he said.
Co-op chief executive Euan Sutherland, brought in 10 months ago to turn around the group, quit on Tuesday, saying it was impossible to reform it unless directors adopted a more commercial approach.
Myners said the organisation needed a chairman or woman with no previous connection or involvement with the organisation.
He said the board should be cut down to six to seven independent non-executive directors in charge of all commercial and financial matters instead of the current 20-member elected board, and no independent societies should sit on it.
A National Membership Council of 100 members including around 20 employees ought to be set up to ensure the mutual's co-operative values and principles were adhered to, he added.
A spokesman for Co-op Bank, which is 70 percent owned by shareholders other than the Co-op Group after it recapitalised late last year, said it had already made significant advances in reforming its own governance and leadership.
"The Bank's Board looks very different today and is managed and governed completely independently to the Group," he said.
The final recommendations will be submitted for consideration by the elected membership at the business' 2014 Annual General Meeting in May.