The scandal-hit Co-operative Group is cutting funding for ethical causes while paying hundreds of thousands of pounds to former Tory aides for advice, the Observer can reveal.

After a series of financial and sex scandals, it has emerged that the board of the Co-operative Group is cutting or terminating donations to charities and organisations, some of which are now facing closure. The organisations include the 130-year-old Co-operative Women's Guild and the Mutuo thinktank, which has been advising the government on public sector reform, as well as Supporters Direct, which promotes fan ownership of football clubs. Some groups have been told that their funding will be cut completely, while others face a loss of between 30% and 50%.

Meanwhile, the Co-operative Group is paying hundreds of thousands of pounds to Quiller Consultants, a lobbying and reputation management firm led by Sean Worth, a former special adviser to David Cameron, along with, until recently, George Bridges, a former Conservative campaign director and close friend to chancellor George Osborne, who is moving to Santander bank. The contract is rumoured within the Co-operative Group to be worth as much as £1m, a figure disputed by sources close to management.

The moves come amid the discovery of a £1.5bn black hole in the Co-op Bank's balance sheets and allegations of incompetence, financial dishonesty and drug-taking surrounding the one-time Labour councillor and former Co-op Bank chairman Paul Flowers, who was elected to the group's board.

It is understood that some members of the Co-operative Group board are concerned that the scandals surrounding Flowers are being used to change the traditional ethical policies and democratic structures of the company. Quiller's role with the Co-op Group is understood to have caused unease. The consultancy, based near Buckingham Palace, has declined to comment on the nature of the services it provides.

A week after the Flowers scandal blew up, members of the group's board were asked by internal email whether they were members of the Labour or Co-operative parties, the Observer has learned. The Co-op board has also been presented with a plan to reduce its elected members from 15 to seven, with four non-executives being brought in, including the chief executive of the Co-op Group, Euan Sutherland. The move would change the power structure of the board at the expense of the democratically elected members.

The developments come in the wake of the Observer's revelation last month that the Co-op Group had made informal contact with MPs representing the Labour party to inform them of a cut of at least 30% to the party's £850,000 a year funding. One senior Labour party source said that a complete termination of funding was not being ruled out.

A spokesman for the Co-operative Group said: "The Co-operative Group is currently conducting a review of its governance to ensure it best serves the needs of its 7 million members and gives them a true voice. The group is also looking closely at the level of financial support it can offer to the wider network of co-operation it has traditionally supported. The group has asked members to contribute their views so that the new management team can give them the organisation and businesses that they deserve and can be proud of."

It is understood the cuts to Mutuo, which promotes mutualism – the system by which customers or employees have some ownership of an organisation – threaten its existence. Rob Harrison, editor of a book on mutualism, People Over Capital, and director of Ethical Consumer magazine, said it would be a mistake for the Co-op Group to tarnish its ethical brand: "There are a lot of members of the Co-operative Group who are going to fight back and kick out. I am aware of a lot of debate and anger."

Flowers is on bail after being arrested in Merseyside in connection with a "drugs supply investigation".

Under the powers of the Financial Services Act 2012, Osborne has ordered an independent investigation into "events at the Co-op Bank and the circumstances surrounding them". This will date from 2008 and include the conduct and appointment of directors.

Euan Sutherland, a non-executive director on the Co-operative Food board in this period, will inevitably face scrutiny, as the finances of the food and bank parts of the group are closely aligned.