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Venture capitalists (VCs) dominate the boards of venture-backed private companies today. In a 2017 study that looked at more than 26,000 such boards over three decades, researchers found that VCs took 50 percent of total board seats. That fraction is the result of many things: VCs requirement to take board seats as a condition to funding, limited planning for the most effective board composition, and a lack of concern for what type of background board members need to best serve the organization. It reflects what happens when companies follow the currently accepted practice of distributing one or two board seats to the lead investor in each funding round.

The fact that this practice is the default has become problematic. It fosters a mentality that a board seat is a mechanism for monitoring an investment, rather than an opportunity to apply one’s skills to grow a company. That mentality breeds a damaging passivity, and it also may represent a potential abdication of board members’ fiduciary duties.

VCs on boards always wear two hats. As board members, they have a fiduciary duty to do what’s best for the company, regardless of their own self-interest; as shareholders, they have a responsibility to their own investors to maximize returns for their fund. These responsibilities usually don’t conflict, but when they do, it can create misalignment with management—a misalignment that is greatly exacerbated by the attitude towards board seats described above.

It’s time to rethink this system. Yes, VCs can make excellent board members, but their background and skill set are not necessarily what a growing company needs most. If boards were composed to optimize for success of the business, instead of around who signed the biggest check, they would be more diverse intellectually and experientially. It’s time for founders to reconsider whether giving 50 percent of seats to VCs is really what will best serve their company.

VCs are never just board directors, they’re shareholders—and that’s a liability

To be fair, the system has survived as long as it has because VCs do offer many advantages as board members. Experienced investors bring a level of expertise, often from having sat on many boards before, and can flag problems they’ve seen that affect high-growth private companies. Most have valuable networks they can bring to bear to recruit talent and strategic partnerships to the company, and constructive independent members to the board.

However, as noted above, inviting VCs onto a board also introduces potential for misalignment. Entrepreneurs usually become entrepreneurs because they have a larger than average appetite for risk. The financial advantages of entrepreneurship are, on average, negligible compared to normal employment; while some founders may dream of billion-dollar exits, the rational entrepreneur isn’t in it for the money, but for the freedom and excitement of building a company from scratch. While a VC needs to have a certain risk tolerance, too, at the end of the day their job is to deliver meaningful returns for their fund. That constraint may in some cases lead them to value a small but guaranteed return over a larger but still hypothetical one—a prioritization that may be misaligned with the entrepreneur’s own ambitions for their company.

For example, when Amazon acquired the online shoe retailer Zappos for $1.2 billion in 2009, it seemed like a massive success for CEO Tony Hsieh, who had just netted a multi-million dollar windfall in a down economy. However, Hsieh has since said that acquisition wasn’t his first choice: he would have actually preferred to keep growing Zappos’ revenue with an eye to going public in 2010. He claims he inked the deal with Amazon because he was afraid his investors were about to oust him as CEO over his refusal to sacrifice Zappos’ unique company culture to boost profits. “The board wanted me, or whoever was CEO, to spend less time on worrying about employee happiness and more time selling shoes,” he wrote in his 2010 book Delivering Happiness.

Hsieh’s account reflects a common tension between VCs and entrepreneurs, in which the latter are much more willing to risk short-term profit for achieving long-term vision for the company.

While a good VC will always walk this line with care and integrity, it’s hard to escape the fact that a founder could minimize opportunities for such misalignments simply by having fewer VCs—or only the right VCs—sit on their board.

Founders can also mitigate the damage by encouraging board members to discuss potential misalignments explicitly. Just like with families, couples, and friends, with boards communication about priorities is key. Board members should feel empowered to talk through any conflicts of interest or other issues between investors and management until everyone understands what the needs are for the various parties, and should also acknowledge how those misalignments could bias decision-making and lead to deeper conflicts.

How to fight passivity in board member VCs

VCs wearing two hats may affect their performance as board members in another, more subtle way. If they prioritize their role as shareholders, they may approach board seats as a mechanism for passively monitoring their investments rather than an opportunity to proactively grow the company. While some founders may see an advantage in this—after all, less active oversight means more freedom for founders—others see it (rightly) as a missed opportunity to fill a board seat with someone who will make a real impact and contribute to the success of the business.

Some VC board members don’t start out as passive, but disengage over time as their expertise loses relevance. Many investors specialize in shepherding companies through a particular phase of growth: they’re good at helping companies get to minimum viable product (MVP) or scale up once they’ve found product-market fit. Once the relevant phase of growth is complete, a VC board member has less to contribute and may cease to participate as actively in board activities. Though this passivity is understandable, it’s also a lost opportunity for the company, which could benefit from having an intellectually engaged director with timely and useful expertise fill that seat.

Entrepreneurs can reduce their chances of a “wasted” board seat by being explicit from the outset about the intellectual commitment they expect from directors. If they expect a VC’s stellar network to be their main contribution to the company, that person might be more suited to being a board observer or sitting on an advisory board rather than being a board director. Similarly, a VC whose expertise will only be relevant to one phase of the company’s growth might not deserve a permanent board seat. Boards should also have mechanisms in place for replacing board members who aren’t contributing usefully to discussion. Entrepreneurs should be open with a particular investor if a representative of their firm is not participating actively; investors, in turn, should be open to replacing that representative.

Overall, entrepreneurs should approach the assignment of a board seat less like distributing a prize and more like hiring for a job. A manager would never hire an engineer or salesperson without first laying out their job responsibilities, clarifying their intellectual commitment, and getting some sense of what value they’d add to the team. When they award board seats by default rather than design, entrepreneurs miss an opportunity to conduct equally thorough due diligence on some of the organization’s most important “employees.”

Board member skills should mirror skills necessary for corporate success

Just like when you’re hiring engineers or salespeople, when you’re hiring board members, qualifications matter. An effective board needs members with a broad spectrum of backgrounds so it can oversee a variety of business functions. Especially in young companies, board members may fill gaps in management’s expertise—for instance, providing critical marketing and customer acquisition resources guidance to a company still scaling its marketing department. Investors’ backgrounds are typically strongest in finance, which limits their ability to assist with this task.

A lack of the right type of functional business expertise on a board can be highly damaging—and having it can be highly valuable. For example, the board of ill-fated Theranos was packed with former government officials who had little to no experience with the biotech industry or with business functions like accounting and auditing, a fact that may have contributed to the company’s fall from grace amid accusations of fraud. Meanwhile, a 2012 study found that public companies with “an industry expert independent director” were 4.6% more valuable than companies without one. Everyone believes that their skillset is the best skillset, but responsible investors should be able to acknowledge when the business would be better served by a greater diversity of input.

The most robust boards are diverse, not only intellectually and experientially but in terms of gender and ethnicity. Some commentators have connected Silicon Valley’s recent spate of sexual harassment and gender discrimination allegations to a lack of women on boards and in other leadership positions at tech companies. According to a 2017 survey by TheBoardlist, 74 percent of private tech companies have no women at all on their boards. By appointing themselves and their employees to boards, venture capitalists replicate a lack of diversity within their own industry. A 2016 survey of 217 VC firms by the National Venture Capital Association found that only 7 percent of partners were women, only 2 percent were Hispanic or Latino, and none at all were African-American.

Even without changing anything else about the current system, investors who want to nurture this kind of diversity can take the initiative to put more thought and attention into who fills the board seat they are allocated in a given deal. For example, while Alpha Edison still takes a board seat on most companies we invest in, we sometimes fill it with an industry expert or someone whose specific skillset can help grow the company. In that case, a representative of our firm remains in the room, but only as an observer. This allows us to maintain some oversight while putting the actual decision-making capability in the hands of someone with deep and useful knowledge. Similar tactics could be used to increase the gender or ethnic diversity of a board that is already stacked with many white males.

How to “hire” a board member

Ultimately, however, the current system does need to change. Here is what we hope the board selection process of the future will look like:

  • Rather than distributing board seats by default to their lead investor—and to whichever representative that lead investor picks to represent the firm—entrepreneurs will head to the table with a strong idea of what kinds of skills and backgrounds they need on their board. Then, they will make their lead investor their partner in “staffing” the right directors on the board, whether they are VCs or experienced salespeople, marketers, and industry experts. Entrepreneurs will look for board members who will be a long-term fit for the company’s needs and who have a strong intellectual commitment to the company’s growth.

  • They will also look to “hire” more than just white men. The Council of Institutional Investors recommends that a “critical mass” of at least 30 percent of seats on a given board should be filled by women and minorities.

  • Entrepreneurs will be explicit about the intellectual commitment they require from board directors, and directors will assiduously apply their skills and expertise to growing the company, understanding that passivity is not an option.

  • Entrepreneurs and investors will openly discuss the potential for misalignment between them and attempt to talk through conflicts before they occur.

  • Entrepreneurs should be more thorough when reference checking potential VC board members to surface the skills they have brought to bear for others,  and to understand how helpful—or unhelpful—they are with those companies.

Founders who are able to hold the line on this will find themselves with more effective, engaged, and diverse boards, and with more successful companies. Similarly, it is time that VCs are more intellectually honest about how they can be more constructive and productive members of the boards they serve—and where appropriate, how they can step down and replace themselves with more suitable board members who can help these companies scale and thrive.