Co-operative bank is facing a crisis
The troubled Co-op now has to struggle out of the crisis. Photograph: Christopher Thomond

When you buy a house, you ask the surveyor to check the foundations and look out for subsidence. Businesses do the same, hiring outside experts to carry out "due diligence" on a purchase. Before the Co-operative agreed to buy Britannia building society in 2009, it paid KPMG £1.3m to kick the tyres. Its report broadly gave Britannia a clean bill of health, noting "no substantial arrears or impairment" and saying its assets were "high-quality".

Yet Britannia, it turns out, was riddled with bad commercial loans – contributing £550m to the Co-op's losses.

A damning report this week by Sir Christopher Kelly, a former top civil servant, said the roots of the crisis lay in poor management, bad lending, a flawed culture and an overambitious drive for growth. Crucially, it said the bank should never have merged with the Britannia five years ago.

Should Co-op sue KPMG for poor advice, and JP Morgan Cazenove, which also endorsed the deal? It's tempting to blame the advisers, but KPMG was specifically told not to examine the corporate loan book at Britannia.

Years later, we don't know if anyone really did. This suggests an extraordinary failure by the Co-op's board, the sort of "governance" problem that has led Lord Myners to recommend junking the existing board structure and relegating elected Co-op members into a supervisory members council, with little executive power.

But it should be noted that the execrable commercial loan decisions were taken by Britannia – which at the time had a governance structure that is near-identical to Nationwide building society today. This suggests it was not necessarily governance that was at the heart of the problem. If, back in 2009, the Co-op had in place the board structure that is proposed today, can we really be sure that the takeover of Britannia would not have happened? After all, JP Morgan Cazenove told Co-op that the commercial logic of the merger was "compelling".

On 17 May the future of the Co-operative Group – from supermarkets to pharmacies and funeral homes, but also taking in its remaining 30% stake in the troubled bank – will be decided. Some life-long members fear the reforms could see the Co-op abandon its history and turn itself into a pale version of the stock market-owned companies with their bonus-driven directors. As one activist tweeted: "Here's a thought. Co-op is 'ungovernable' (Sutherland) and 'needs a plc style board' (Myners). How did it manage 1844 to 2009?" (Euan Sutherland was the managing director who quit the Co-op when his £6.6m two-year pay package was leaked).

What is undeniable is that the Co-op is in a tragic mess. Governance reforms are inevitable and should be accepted at the vote, even if it means holding your nose when voting. Without a vote in favour, it may struggle with future debt issues. But governance reforms alone won't save it. They may be crucial at board level, but for customers at the supermarket checkout or picking up a prescription in the pharmacy, they are near meaningless. The challenge for the Co-operative now is to make commercial sense of its values, ethics and principles.

In the past it had the "divi", but that space is occupied by loyalty schemes such as Clubcard and Nectar. Nor is its ethical/organic/fairtrade food policy uniquely appealing when many other supermarkets (look at Waitrose and Marks & Spencer) offer the same.

What would make me shop more at the Co-op? How about paying checkout staff the living wage (£7.65 outside London), though that would cost it upwards of £50m. I'd be impressed if its bosses agreed to cap their pay at, say, 20 times their worst-paid member of staff, rather than the 260 times common today among UK chief executives. That would get me through the doors.

What would make you want to shop there?