NED Roles in SMEs and Startups: Why They Fail and What Works
The role of non-executive director in a small company or startup carries the same legal weight regardless of whether the company has five employees or five hundred. The Corporations Act does not offer a small-company discount. Your duties to act in good faith, to exercise care and diligence, and to prevent insolvent trading apply in full whether you are sitting on the board of an established organisation with a full governance team behind you or a founder-led startup running on enthusiasm and determination. Done well, the role is also one of the more rewarding things you can do; you get to contribute to something being built from the ground up, and the wins feel real in a way they rarely do at scale.
That is where most of the problem begins.
I have been a non-executive director in a small company at the same time as being a co-founder and experienced operator. I have also watched, from close range, what happens when the structural conditions for effective oversight are not in place. What I want to do here is describe the patterns I have observed, reflect honestly on what I have learned, and offer some practical thinking for anyone considering a NED role in an SME or early-stage company.
Why is governance harder in small companies? The structural mismatch
In a large organisation, the non-executive director arrives into an environment built to support them. There is a company secretary managing board papers. There is a CFO preparing financial reports to a defined schedule. There are audit and risk committees. There are internal controls. The executive team is accountable to the board through a structure that has been designed, refined and legally reinforced over time.
In a small company, the NED often arrives into the opposite: a company that has not yet built those systems, run by a founder whose identity is tightly bound to the business, and where informal norms are often more powerful than documented ones. The shareholders agreement might require quarterly board meetings and monthly management accounts. In practice, you might get neither.
This is not always a sign of bad intent. Founders are typically stretched, focused on survival, and genuinely believe they can update the board informally. But that informality creates a serious problem for the NED. Without structured, documented information flows, it is nearly impossible to form a view on what is actually happening in the business. And without that view, you cannot exercise independent oversight. You are, in effect, a director in name only.
I have seen this play out in a scale-up where the CEO would update the chair verbally every week. The chair was confident in the CEO’s abilities and the company’s trajectory, and that confidence was not entirely misplaced. But the board never properly functioned. There were no formal reports, no documented decisions, no structured accountability. The informal relationship between two individuals substituted for governance, and the rest of the board operated largely in the dark. That company no longer exists.
Three ways I’ve seen NED oversight fail in small companies
The first is information access. A NED has a right to information under the Corporations Act and, typically, under any shareholders agreement governing the company. In practice, that right can be systematically undermined: financial reports not produced, bank account access restricted, external advisers instructed not to share information with certain directors. When this happens, the NED is being asked to fulfil duties they physically cannot fulfil. The temptation is to wait it out, give the founder the benefit of the doubt, and to escalate gently in the hope that things improve. My observation is that gentle escalation without written documentation achieves very little. The paper trail matters enormously.
The second is power concentration. Many small companies are effectively controlled by a single individual who is simultaneously the founder, the CEO, and the dominant figure in any board dynamic. This is not inherently wrong. What makes it dangerous is when there is no genuine counterweight: no independent chair, no robust shareholders agreement, no directors willing to push back. In those conditions, the NED's independence can become a source of conflict rather than a contribution, and the response is often to marginalise rather than engage.
The third is board dysfunction that is never formally named. Meetings not called. Quorums not reached. Resolutions passed informally and recorded poorly. Conflicts of interest not declared. These are often not dramatic events. They accumulate quietly until the company is in serious trouble, at which point the governance failures become very visible and very costly.
What founders actually need from a NED
Founders rarely think clearly about what they need from a non-executive director when they appoint one. They often think in terms of networks, credibility, or specific expertise. Those things have real value, of course. But the more important contribution of a good NED is independent challenge: the willingness to ask the question the room is avoiding, to notice the pattern in the numbers that no one is naming, to push back on a decision that feels momentum-driven rather than evidence-based.
That kind of contribution requires a founder who genuinely wants it, not just the optics of it. My experience is that founders who have never worked closely with strong independent directors often confuse governance with obstruction. They have built something remarkable through sheer force of will, and a director asking uncomfortable questions can feel like an attack rather than a service. Bridging that gap is partly a relationship question and partly a structural one. You need both.
There is a more subtle version worth noting. In rare cases, a charismatic founder or CEO who has worked with strong independent directors before can be highly adept at managing them, rather than being genuinely accountable to them. They know the language of governance, they know how to present information selectively, and they know how to make a board feel informed without it actually being so. This is harder to detect and harder to address than outright obstruction, because it can look like good governance from the outside for a long time.
There is a practical alternative worth raising with founders who are not yet ready for a fiduciary board: the advisory board. If what a founder genuinely wants is access to networks, expertise and a sounding board, without the accountability structures a proper board requires, an advisory board is a more honest arrangement. It carries no fiduciary duties and no ASIC consent form. For the prospective NED, it also removes the legal exposure described in this article. Think of it as a stepping stone: a way for the company to build the habits of governance before taking on the obligations of it. Some founders get there. Some do not. But the conversation is worth having early.
What actually works
Before any of that: verify the Directors and Officers (D&O) insurance and insist on a Deed of Access, Insurance and Indemnity before you sign an ASIC consent form. Directors and Officers insurance is not a formality. You need to confirm it is current, that the coverage limit is adequate, and that it extends to your role specifically. The Deed of Indemnity is equally important and frequently overlooked in small companies. Unlike the shareholders agreement, it is a personal contract between you and the company, and it survives your resignation. If the company cannot or will not provide either, that tells you something worth knowing before you join.
If I were advising someone considering a NED role in a small company today, I would start with the shareholders agreement. Not the existence of one, but what it actually says about information rights, board meeting frequency, voting thresholds, and what happens when those obligations are not met. A well-drafted shareholders agreement with clear consequences for breach is one of the few structural tools a minority NED has.
The second thing I would say is: document everything in writing. Verbal requests for information, verbal concerns about solvency, verbal objections to decisions will not protect you if things go wrong. Formal written correspondence does. Not because you are preparing for litigation, but because it creates accountability and forces the company to respond formally. In my experience, companies that are avoiding oversight will generally keep avoiding it until it costs them something to do so, and sometimes even then.
Third, take your own governance obligations seriously before you need them. I completed my AICD Graduate qualification during one of the most difficult periods of my professional career, partly because I wanted to be certain I understood exactly what my duties were and how to discharge them. It is remarkably easy to focus on the business and let your own governance knowledge slide. That is a risk you carry personally.
Finally, and this is the one most NEDs resist: know when to resign and document why. Resignation is not failure. Staying in a role where you cannot access information, cannot influence decisions, and cannot discharge your duties is the failure. If you resign, write to the board explaining exactly why. File it with ASIC if appropriate. That record matters, for you and for others who come after.
A governance mentor of mine resigned within the first few months of her very first NED appointment. It also happened to be with her dream organisation. I cannot imagine what that cost her, but she made the call because the conditions for genuine oversight were not there. She went on to become one of the most respected governance professionals I know, widely recognised for her contribution to the field. That is what doing the right thing actually looks like. It does not always feel like it at the time.
The honest version
NED roles in small companies are genuinely useful and can be tremendously rewarding. But they require a clearer-eyed assessment of structural risk than most people bring to them. The law applies equally. The infrastructure does not. And in the gap between those two realities, a lot of good people find themselves in positions they did not anticipate and cannot easily exit.
The version that actually works is one where the NED goes in with open eyes, insists on the structural conditions for genuine oversight, documents concerns in writing from the start, and is willing to walk away if those conditions cannot be met. It is more demanding than it looks. It is also more important than it looks.
Lessons learned
I went into my NED role believing that good intent and hard work would be enough. They are not. The structural conditions for oversight matter more than the goodwill of the people involved, and in my experience goodwill can erode surprisingly quickly once a company comes under real pressure.
Written documentation is not bureaucracy. It is the only thing that creates accountability in the absence of trust. Every concern I raised verbally and did not follow up in writing effectively disappeared.
The hardest lesson: there is a point at which staying becomes its own form of failure. Recognising that point, and acting on it, takes more courage than most governance writing acknowledges.
Key takeaways – for founders and CEOs
A NED who asks hard questions is doing their job. If that feels like obstruction, the problem is not the director.
Verbal updates to the chair are not governance. Board papers, documented decisions and formal reporting are.
The shareholders agreement you signed has obligations in it. Your directors are entitled to hold you to them.
Appointing strong independent directors and then managing around them is worse than not appointing them at all.
Key takeaways – for board members and NEDs
Read the shareholders agreement before you accept the role, not after.
If you cannot get financial information, put every request in writing. Every time.
Independent challenge is your primary contribution. If you are not doing it, you are not doing the job.
Resignation in the right circumstances is an act of integrity, not defeat. Document your reasons and file them.
Frequently asked questions
What protections should a non-executive director insist on before joining the board of an Australian SME or startup? Two before anything else: current Directors and Officers (D&O) insurance with a coverage limit adequate for the risk, and a Deed of Access, Insurance and Indemnity signed before you submit your ASIC consent form. The Deed is a personal contract between you and the company and, unlike the shareholders agreement, it survives your resignation. If the company will not provide either, that is a material signal about how the role will actually operate.
Is an advisory board a better option than a formal board for an early-stage company? Often, yes. If the founder’s genuine need is networks, expertise, and a sounding board rather than fiduciary oversight, an advisory board is a more honest arrangement. It carries no fiduciary duties and no ASIC consent form, and it removes the legal exposure that comes with a full NED appointment. It works best as a stepping stone, a way for the company to build governance habits before taking on the obligations of a formal board.
When should a non-executive director resign from a small company board? When you cannot access the information you need to discharge your duties, cannot meaningfully influence decisions, and the conditions for proper oversight are not being met and are not going to be. Staying in those circumstances is its own form of failure. If you do resign, document your reasons in writing to the board and file with ASIC where appropriate, because that record matters for you and for others.
I'm John Chung, I've spent over 15 years building and running startups and scale-ups as a founder, operator, and non-executive director (GAICD). I write about the gap between how companies are supposed to operate and how they actually operate.
All content is produced by me, reflecting my own experience and judgement. Generative AI tools were used for editorial support, in this case Claude specifically.