Cybersecurity: Five Guiding Principles for Boards

February 22, 2018 | Imran Ahmad

Data breaches and cyber-attacks continue to represent important threats to businesses of all shapes and sizes. High-profile data breaches have prompted heightened regulatory, shareholder, and public scrutiny of boardroom preparedness. While the importance of cybersecurity at the Board level may be obvious, it is often difficult to translate that awareness into concrete steps that should be taken.

The Threat

Cyber criminals target organizations for many reasons and through different means. However, their motivation for doing so is often very simple: making easy money. They rely on hacks, data viruses, scams, skimming, data sharing by disgruntled employees and data farming as means to either extort payment from organizations or sell the stolen data on the “dark web”. The data they steal can range from customer and employee information, to intellectual property (including trade secrets, business plans, source code, etc.), and other confidential information.

If successful, the cybersecurity incident can have a significant and long-lasting impact on the victim organization. This can include operational disruption, financial loss, regulatory investigations, shareholder and partner organization scrutiny, as well as reputational harm.

Not surprisingly, there is a general unease at the Board level in terms of their preparedness to face a significant cyber incident. According to a report by the National Association of Corporate Directors[1] (the “NACD”), while close to 89% of public-company directors discuss cybersecurity matters “regularly”, less than 40% are “confident” that their company is properly secured against a cyber-attack,  and only 5% are “very confident”.  Moreover, Boards must strike a difficult balance between maintaining security of the organization’s data, while continuing to ensure profitability and growth in a competitive environment.

Five Guiding Principles

The NACD provides five helpful guiding principles for effective cyber-risk oversight that organizations can adopt and customize to their specific needs (e.g., size, life-cycle stage, strategy, business plans, industry sector, geographic footprint, etc.).

1. Principle 1: Organize the Board for Cybersecurity Discussions. While there is no “one-size-fits-all” model (some organizations opt to have cyber-risk-related discussions at the full-board level, while others assign cybersecurity-related oversight to one or more committees, such as an audit, risk or technology committee), the full Board should nevertheless be briefed on cybersecurity matters at least semi-annually and as specific incidents or situations warrant.

 Additionally, while including cybersecurity as a stand-alone item on a Board or committee meeting agenda is now common practice, the issue should also be integrated into full-board discussions involving mergers and acquisitions, new business plans and product offerings, deployment of new technologies, and major capital investment decisions, such as facility expansions or IT system upgrades.

2. Principle 2: Understand the Legal Implications of a Cybersecurity Incident. Given that the legal and regulatory landscape related to cybersecurity is constantly evolving, Board directors should stay abreast of current liability issues faced by their organization, and potentially, by directors on an individual or collective basis.

This is particularly true in the case of public companies that have an obligation to disclose cybersecurity risks and incidents in their public filings (see Canadian Securities Administrators’ Staff Notice 51-347 – Disclosure of cyber security risks and incidents).  Factors that should be taken into consideration include: frequency and severity of prior cyber incidents, potential costs and consequences, adequacy of preventative actions taken, risk level of threatened attack, etc.

3. Principle 3: Access to Cybersecurity Experts. Understanding cyber threats facing an organization can be a moving target. To assist the Board in reaching a high-level of cyber literacy, the following measures should be considered: (i) scheduling deep-dive briefings or examinations from independent and objective third-party experts to validate the organization’s cybersecurity program; (ii) leveraging the Board’s existing independent advisors who have multi-client and industry-wide perspective on cyber-risk trends; and (iii) encouraging director-education programs (internally or externally) related to cyber-risk management.

4. Principle 4: Expectations of Management. The Board should establish a clear expectation that management will develop and implement an enterprise-wide cyber-risk management framework. Again, while there is no “one-size-fits-all” approach, using the U.S. Government’s National Institute of Standards and Technology (“NIST”) Cybersecurity Framework is a good starting point. This basic framework can then be used as a foundation and then the organization can have industry-specific requirements overlaid onto it.  Along with setting the expectations, it is incumbent on the Board to provide management with adequate staffing and budget to ensure the implementation of the framework.

5. Principle 5: Managing the Risk. Recognizing that total cybersecurity is an unrealistic objective; Boards need to determine their overall risk appetite. To this end, they should determine: (i) what the potential impact(s) of a cybersecurity incident would be on the organization, (ii) what resources they can realistically deploy to mitigate negative impacts that may flow from it, and (iii) whether there are ways to transfer some of the risk. As part of a cyber risk management strategy, organizations should seriously consider obtaining cyber insurance coverage which provides financial reimbursement for unexpected losses related to cybersecurity incidents.

Takeaways

In recent years, there has been a change where it is no longer sufficient for Boards to be aware of cyber-risks – they are now required to understand those risks and be actively engaged in constantly improving their organization’s cyber preparedness. They need to continuously assess their organization’s capacity to effectively deal with a cybersecurity incident, both in terms of their fiduciary obligations as well as their oversight of management’s activities. While each organization will need to develop and implement a risk management strategy that meets its unique requirements, the principles outlined above should be viewed as a good starting point.


[1] National Association of Corporate Directors, NACD Director’s Handbook on Cyber-Risk Oversight, page 7.

Disclaimer

The blog sets out a variety of materials relating to the law to be used for educational and non-commercial purposes only; the author(s) of the blog do not intend the blog to be a source of legal advice. Please retain and seek the advice of a lawyer and use your own good judgement before choosing to act on any information included in the blog. If you choose to rely on the materials, you do so entirely at your own risk.