(Corrects 16 paragraph to say Co-op Group's stake in bank fell to 30 percent, not 20 percent)
* Board not competent to perform duties -Myners
* Governance structure led to horrendous losses -Myners
* Funeral business could be worth 1 bln stg plus -Myners
* Former bank chairman pleads guilty to drugs charge
* Co-op chairwoman says board committed to reform
By Matt Scuffham
LONDON, May 7 (Reuters) - Former government minister Paul Myners has launched a blistering attack on the stewardship of Britain's Co-operative Group and said it must reform in order to survive.
Myners said the board of the 150-year-old mutual is not up to the task of governing the customer-owned business, which has been rocked by a 1.9 billion pound ($3.2 billion) funding gap at its bank and an exodus of senior directors.
"The governance structure we have at the moment has led to horrendous losses and a level of debt which is way above that of equivalent commercial competitors. That needs to be fixed. This board is not competent to perform the duties expected of it," Myners told reporters on a conference call on Wednesday.
Myners was appointed as Co-op's senior independent director last December and was asked to review its governance. He quit that post in April amid resistance to his proposals, but agreed to stay on until the annual shareholders' meeting on May 17 to complete his review.
Co-op, whose businesses range from supermarkets to funeral parlours, is fighting to survive after posting the biggest loss in its history, and has seen bitter infighting among members about its future strategy and proposals for reform.
The group made a loss of 2.5 billion pounds in 2013 and its net debt reached 1.4 billion pounds. It also faced embarrassment when its former bank chairman Paul Flowers was arrested for possessing drugs. He pleaded guilty on Wednesday.
Co-op is considering the sale of its pharmacy and farms businesses to cut debt and Myners said it could come under pressure to sell its funeral business, which he described as the "jewel in the Co-operative portfolio" which "could easily fetch in excess of 1 billion pounds" from a private equity buyer.
Myners, also a former chairman of retailer Marks & Spencer , said the group's lenders, which include Royal Bank of Scotland and Barclays, may intervene if Co-op officials don't back proposals for reform at the May 17 meeting.
"If change doesn't take place the Co-op will continue to decline and it is quite probable that banks, who already have some direction on what the Co-op does, will take an even greater interest," he said.
"This is not an easy exercise, to confront people with unpleasant truths, but I felt it was my duty to do so. I was under a lot of pressure from people to compromise. I said that would be a disservice to the Co-operative movement," he said.
NOT FIT FOR PURPOSE
Myners' departure followed that of former Chief Executive Euan Sutherland, who left after just 10 months saying the organisation was ungovernable. Sutherland was unhappy after his pay was leaked to a newspaper.
"The loss of Euan Sutherland is a catastrophe for the Co-op. He was the right man and he was forced out by some people who should lower their heads in shame because they certainly did not behave in a way that Co-operative values and principles suggest that they should," Myners said.
In his 184-page report, Myners said the current management structure at the Co-op was "not fit for purpose".
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.
"It places individuals who do not possess the requisite skills and experience into positions where their lack of understanding prevents them from exercising the necessary oversight of the executive," Myners said.
Methodist minister Flowers was appointed chairman of the Co-operative Bank in 2010 despite having little banking experience. The bank fell under the control of bondholders including U.S. hedge funds last year after a restructuring which saw the Co-op Group's stake fall to 30 percent.
Myners said the Co-op should create a new streamlined board led by a chairman with no previous association with the group, six or seven independent non-executive directors and two executive directors.
Myners also recommended a National Membership Council be set up, consisting of about 50 individuals, including around 10 employees. This council would elect a steering committee of 12 members including representatives from independent societies.
In addition he proposed all Co-op members be given the right to vote on the election of board members, the right to attend general meetings and to approve significant transactions.
Co-op Chairwoman Ursula Lidbetter said reforms were critical to the group's future. "The board has made clear its commitment to far-reaching and fundamental reform of our governance," she said. ($1 = 0.5885 British Pounds) (Editing by William Hardy)