Effectively Briefing the Board on IT Risks
Innovative technology can be a differentiator as well as a disruptor in today’s marketplace. Technological advancements are rapidly compressing the half-life of business models and industries that historically have not been viewed as dependent on technology are now being transformed by it and their business models can no longer function without these latest advancements. Consider Uber. The ability to book, track, and pay for a cab from a mobile device significantly differentiated this business from traditional taxi services. The bottom line is that technology is no longer a mere enabler.
At Protiviti, we often receive feedback from directors stating they do not have a sufficient understanding of the information technology (IT) risks facing their organizations. Furthermore, according to the 2014−2015 NACD Public Company Governance Survey, IT was the area with the least amount of satisfaction in terms of both quality and quantity of information received from management.
The board needs to understand IT as a critical enterprise asset, and the opportunities and risks associated with it must be communicated in a manner directors can understand. Directors instinctively know IT risks have increased in significance. Social business, cloud computing, mobile technologies and other developments offer significant opportunities for creating cost-effective business models and enhancing customer experiences. They also may spawn disruptive change, increased privacy and security risks, and further exposure to cyberattacks.
These changes present fresh challenges that create a moving target for companies to manage. While the velocity of disruptive innovation through emerging technologies is not as immediate as a sudden catastrophic event, its persistence of impact is potentially lethal for organizations caught on the wrong side of the change curve.
Add to all of the above the evolving relationship between the CIO and CISO and the board (or the supervisory board in a two-tiered board structure). These dynamics sum up the environment and expectations that these executives face as they address boards now and in the future, placing their interactions with the board within a business model, strategic and/or risk context.
In many organizations, the chief information officer (CIO) and chief information security officer (CISO) brief the full board or the audit committee on the state of IT on an annual basis, if not more frequently. They can approach this briefing in three ways:
- Within the context of the business. The CIO or CISO addresses how the business model leverages technology to deliver the products and services the company offers the marketplace and the opportunities and exposures resulting from disruptive change. The business context briefing answers questions such as:
- Do we understand potentially disruptive technologies at an industry level? Are we ahead of the curve to the extent that we are able to integrate new technologies into the business on a timely basis?
- Are emerging technologies being deployed effectively to achieve our business objectives (e.g., achieve customer loyalty, improve quality, compress time, reduce costs and risks, and drive innovation)?
- Are we positioning the company’s operations to anticipate and proactively drive the innovative change needed to secure sustainable competitive advantage?
- What emerging technologies could alter the competitive landscape, customer expectations, and strategic supplier and/or distribution channel relationships within the value chain in which we operate? To what extent are our operations and currently deployed technologies exposed to disruptive change?
- Are there aspects of our technological capabilities that we should be sharing with analysts, shareholders, and the general public? If so, are we sharing them? If not, why not?
- Within the context of executing the strategy. The CIO or CISO articulates how strategic initiatives are driven by critical technologies and how the organization is facilitating the design and implementation of controls over these various technologies to ensure they perform effectively. The strategic execution context briefing answers questions such as:
- What technologies are critical to implementing our strategic initiatives (e.g., growth, profitability enhancement, innovation, and process improvement)?
- How are we ensuring that these technologies are functioning effectively?
- How is the IT department collaborating with other functional units and the lines of business to ensure that an appropriate return on the organization’s investment in these technologies is being realized?
- What challenges are we encountering in implementing these technologies to execute our strategy? What is the potential impact of these challenges on the success of our strategic initiatives?
- Do we have the reliable and timely information and data we need to execute strategic initiatives?
- Within the context of mitigating risks. The CIO or CISO uses a broader business view to identify specific risks that either may be a result of technology or are mitigated partly through the application of technology. The risk mitigation context briefing answers questions such as:
- What are the most significant risks arising from IT, and how do they affect the business, including its reputation and brand image? Have we assessed our tolerance for these risks?
- Are we mitigating the critical risks to an acceptable level? How do we know?
- What critical business risks are we mitigating using a risk response that relies upon an important technology component? Is this technology component performing effectively? How do we know?
The objective is to provide a briefing on IT matters that resonate with directors across all of the above contexts:
- The business context: Are we managing disruptive change?
- The strategic context: Are we maximizing value contributed and return on investment?
- The risk mitigation context: Are we managing the business and reputational impact of our risks?
Two principles underpin this discussion: (1) business objectives are also IT objectives, and (2) IT risks represent business risks. Using these principles, the above contextual perspectives provide insights to CIOs as to how they should communicate with boards and to board members as to the information they should expect from CIOs.
Citing and then speaking to the above contexts in a crisp, nontechnical manner can facilitate an ongoing board dialogue. In this regard, the CIO or CISO should:
- Demonstrate an understanding of the business. Using the appropriate context, drill down to the relevant IT-related objectives, plans for achieving objectives, organizational capabilities to execute plans, and measures by which to gauge progress. In today’s world, technology can facilitate and expedite business transformation and growth through technological innovation (the business context), but it also can destroy reputations if not adequately protected and controlled (the risk mitigation context). Board members should be counseled on both of these interrelated contexts.
- Focus on the board’s needs. The board has little interest in the intricacies of how the CIO or CISO organization is run and managed. Don’t go there unless requested.
- Address business impact and metrics, not just IT impact and metrics. Provide an end-to-end view and focus on business consequences. For example, consider the following metric: “99 percent of our systems are patched within 10 days.” This metric leaves unaddressed the question as to the sensitivity of the data and/or business consequences of service failure of the other 1 percent of systems.
- Target the audience. Understand the purpose of the briefing. Ask the board committee chair for direction. Ask people who have presented to the board for insight as to the background and personalities of the various directors.
- Keep it pithy. Identify the key message points directors should take away, and focus on supporting those points. Share sophisticated knowledge judiciously. Allow time for questions. Expect to be asked to expedite your briefing if it is scheduled late in the day.
Boards need to clarify their expectations of the CIO and CISO. What are the directors’ needs, what do they not understand, and what IT issues and related business risks concern them the most? More important, what context(s) do directors want these executives to address when presenting on IT matters? In addition, directors need to be realistic with their expectations of CIOs and CISOs due to the natural complexity of IT. Accordingly, the allotted presentation time should be commensurate with directors’ expectations of the briefing.
Questions for Boards
Below are some suggested questions that boards may consider, based on the risks inherent in the entity’s operations:
- Is the strategy-setting process influenced by the opportunities presented by technology and the potential to lead and/or respond to disruptive change? Alternatively, is technology narrowly viewed as a strategic enabler?
- Does the board devote sufficient time to IT matters, including related opportunities and risks, as well as the organization’s capabilities and processes in managing those opportunities and risks?
- Is the board satisfied with the CIO’s periodic communications? If not, has the board conveyed its expectations to the CIO so that future communications are on point?
- Is the CIO organization effective in supporting the changing needs of the business and monitoring technology innovations, including how new technology can be deployed by competitors (or employees) to create disruptive change? Does the CIO assist the board in understanding these issues?
- Given growth in the number of cyber threats confronting organizations, does the board have an active dialogue with the CISO on incident response preparedness?
- For significant IT projects, does the board understand the underlying assumptions about how each project achieves strategic goals, as well as how success will be measured? Is there follow-up to ensure that each significant project delivers on promises made?