By Kate Holton and Matt Scuffham
LONDON (Reuters) - A former government minister appointed only four months ago to revive Britain's Co-operative Group <42TE.L> quit on Thursday, becoming the second experienced executive to walk away and throwing into fresh doubt the future of the 170-year-old mutual.
Paul Myners, in his role as senior independent director, had warned in March that the customer-owned group, whose activities range from supermarkets to farms, faced extinction unless it reformed to become more commercially driven.
The Co-op said Myners would depart after the group's annual meeting on May 17, at which point his proposals for reform would be put to members for a vote.
Myners said in a statement: "I am confident that there is a good future for The Co-operative Group if it commits to doing the right things on governance and leadership." He said he was pleased members would get to vote on his proposals but made no further comment.
With the group in turmoil after a series of scandals, Myners had accepted a token salary of 1 pound in December to review its operations. His exit comes after Chief Executive Euan Sutherland last month quit from what he described as an "ungovernable" organization after only 10 months in the role.
Observers said the loss of Myners, formerly a minister in the British Treasury with decades of experience in major companies, showed he had lost his battle with the group's members to rebuild it more in line with a public company.
"The resignation of a senior director and CEO within weeks of each is part of the ongoing 'omnishambles' at the Co-op group," Professor Andre Spicer of Cass Business School said, in a reference to a catchphrase from a satirical British TV program.
The Co-op, owned by its 7.2 million members and which retains a minority stake in the scandal-hit Co-op Bank, was hit by one problem after another last year. Its full-year results due to be published next week are expected to show a loss of around 2 billion pounds for a group which touts itself as an ethical alternative to profit-driven rivals.
Co-op Bank's former chairman Paul Flowers was arrested as part of an investigation into the supply of illegal drugs and the ex-Methodist minister was also revealed to have been given the job despite having no senior-level banking experience.
His departure in June came shortly after regulators found a 1.5 billion pound ($2.5 billion) capital hole at the banking unit, forcing it into the arms of its creditors and denying the Co-op Group control of the lender.
Jesse Norman, a legislator who belongs to the Conservatives who form the senior party in Britain's ruling coalition, said on Twitter: "They really seem to be in a tragic mess".
Chairwoman Ursula Lidbetter said in a statement the organization was committed to reforming its governance.
Just days after Sutherland's abrupt departure, Myners had warned that the Co-op was on course for collapse if it did not reform its unwieldy structure. He urged the company to create a smaller board with the skills to hold executives to account.
The board is made up of members from its regional boards and independent Co-operative Societies and is entirely non-executive, meaning no director is involved in day-to-day operations.
Myners warned then that he was also "deeply troubled by the disdain and lack of respect" for the executive team he had witnessed from some members of the board.
Separately the Institute of Directors (IoD), a business pressure group, warned that not only did the Co-op's current model not work, it threatened its very existence.
Co-op Bank will publish its 2013 results on Friday. The bank, which fell under the control of a group of hedge funds after the capital shortfall was exposed, is expected to post a pretax loss of between 1.2 billion pounds and 1.3 billion.
Co-op Bank said in March it needed to raise another 400 million pounds to cover the costs of past misconduct, including compensation for mis-sold loan insurance and repayments to mortgage customers who were overcharged.
Co-op Group, which saw its stake in the bank fall to 30 percent following last year's restructuring, is considering whether to take part in the latest fundraising.
The group, which has agreed to pump another 263 million pounds into the bank this year as part of the original bailout, would need to stump up a further 120 million in order to maintain its 30 percent stake.
Co-op Bank's remaining shareholders, which include hedge funds such as Perry Capital, Beach Point Capital and Silver Point Capital, will also need to stump up more cash. Banking industry sources say they have little choice but to do so or risk losing the 1.2 billion pounds they have already put in.
Faced with such an uncertain future, Co-op Group has announced plans to sell its farms business and is considering a sale of its pharmacy chain in order to raise the required funds. Banking industry sources say the pharmacy business could fetch between 450 million pounds and 500 million.
(Editing by Tom Pfeiffer and David Holmes)