Cybersecurity on Radar Screen of Boards of Directors

by Akin Gump Strauss Hauer & Feld LLP
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Cybersecurity has become one of the hottest topics in the boardroom as companies wrestle with ever increasing threats to their information systems and intellectual property.  A recent study by the Ponemon Institute found that in the past year the number of successful cyber attacks on companies surveyed jumped 42 percent compared to the prior year.1  According to the Department of Homeland Security, the number of cyber threats to critical U.S. infrastructure by mid-2013 had already exceeded the total number of incidents in 2012.2

This dramatic rise in cyber attacks and data breaches has placed cybersecurity on the radar screen of virtually all companies.  In addition to potential lawsuits, damage to reputation and loss of customers, companies are facing increasing regulatory scrutiny about the adequacy of their data security measures.  The FTC has brought more than 40 actions against companies for data breach, claiming that failures to prevent unauthorized access to consumers’ personal information constitute unfair or deceptive acts.  In almost all instances, companies have settled by entering into consent decrees requiring them to implement better information security programs and obtain annual independent audits for 20 years.  In one closely watched case, however, Wyndham Hotels is challenging the FTC’s authority to impose cybersecurity standards.

The SEC has also made cybersecurity risk a top disclosure priority.  In 2011, the SEC issued guidance regarding company disclosure obligations about material cybersecurity risks and cyber incidents.  Since then, the SEC has sent comment letters to at least 50 companies regarding the adequacy of their disclosures.  In May, SEC Chairman Mary Jo White instructed her staff to evaluate its current guidance and consider whether more stringent requirements are needed.

In February 2013, President Obama signed an executive order directing the National Institute of Standards and Technology to develop a voluntary cybersecurity framework for reducing cybersecurity risks to critical infrastructure.  A preliminary draft of the framework was published for public comment on October 22, 2013, with the final version due early next year.  Legislation essentially codifying President Obama’s executive order is currently wending its way through Congress.  While voluntary, the framework will likely influence “best practices” with respect to data security throughout corporate America.

As part of a board’s risk management oversight function, directors should carefully assess the adequacy of their company’s data security measures.  Among other things, directors should address the following areas:

  • Oversight structure.  Directors should have a clear understanding of who has primary responsibility for cybersecurity oversight.  In a recent survey, 54 percent of directors responding said that their company’s audit committee had primary oversight of IT risks, while 26 percent said that primary oversight rested with the entire board and 10 percent indicated that primary oversight was delegated to a separate risk or IT committee.3
  • Board education.  Oversight of cybersecurity may be particularly challenging for directors in light of the rapid advances in information technology.  Based on a recent survey, over one-third of boards engaged an outside consultant last year to advise the board on IT strategy and risk.4
  • Cybersecurity risk profile.  Directors should understand the company’s cybersecurity risk profile, including the potential likelihood, frequency and severity of cyber attacks and data breaches and the potential impact that such incidents could have on the company’s business.  For example, a real estate company may have a low cybersecurity risk profile, while a financial services or health care company would typically face much higher risks.
  • Risk management review.  The board or appropriate committee should review with management the adequacy of the company’s cyber risk management practices.  In particular, directors should probe whether the measures that management has put in place are appropriate in light of the company’s cyber risk profile.  Directors should also inquire about the company’s contingency plans for responding to a cyber breach, as well as steps the company has taken to monitor cybersecurity risks associated with vendors and other third-party service providers.  The board or responsible committee should also review the adequacy of the annual IT budget.
  • Reporting processes.  Directors should ensure that they are getting the information they need to understand the company’s cyber risks and the company’s approach to managing those risks.  The board or responsible committee should require regular reports from senior management and may wish to meet directly with the chief information officer.  According to a recent survey, 31 percent of directors surveyed said that they meet at least twice a year with the company’s chief information officer and 20 percent said that they meet with the CIO at every formal board meeting.5
  • Insurance.  Another area of concern is the adequacy of the company’s insurance coverage for data breaches.  Some insurance companies have sought to deny coverage for cyber losses under traditional general liability policies.  Consequently, many companies are purchasing separate cybersecurity risk insurance.

This post was excerpted from our “Top 10 Topics for Directors in 2014” alert.

1   Ponemon Institute, “2012 Cost of Cyber Crime Study.”

2   Alexei Alexis, DHS Report Shows “Troubling” Cybersecurity Trend, Carper Says, Bloomberg BNA Federal Contracts Report, July 9, 2013.

3  PwC’s 2013 Annual Corporate Directors Survey at p. 29.

4  Id. at p. 30.

5   Id. at p. 28.


 

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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