The major cyber breach that Yahoo announced last week has ripple effects not only for the multimedia platform, but for every company. The incident already has caught the attention of a senator who is calling on the U.S. Securities and Exchange Commission (SEC) to investigate how Yahoo disclosed the breach to shareholders and the public.
Background on the Breach
Ashley Marchand Orme
Account data for at least 500 million users was stolen by what Yahoo has called a “state-sponsored actor” in what CNN Money calls one of the largest data breaches ever. Compromised information includes names, email addresses, phone numbers, dates of birth, encrypted passwords, and security questions.
Yahoo has not named a country of origin for the hacker. The company, which Verizon is seeking to acquire, is still one of the busiest online sites, boasting one billion monthly users.
The breach occurred in late 2014, according to Yahoo, but the company just disclosed the incident in a press release dated Sept. 22, 2016. The Financial Times reports that Yahoo CEO Marissa Mayer may have known about the breach as early as July of this year, raising questions as to why it wasn’t disclosed sooner.
Attention From Lawmakers
Sen. Mark R. Warner (D.-VA), a member of the Senate Intelligence and Banking Committees and cofounder of the Senate Cybersecurity Caucus, sent a letter to the SEC yesterday asking the agency to investigate whether Yahoo complied with federal securities law regarding how and when it disclosed the incident.
“Data security increasingly represents an issue of vital importance to management, customers, and shareholders, with major corporate liability, business continuity, and governance implications,” the senator wrote.
Warner—who cofounded the company that became Nextel, a wireless service operator that merged with Verizon—also told the SEC that “since published reports indicate fewer than 100 of approximately 9,000 publicly listed companies have reported a material data breach since 2010, I encourage you to evaluate the adequacy of current SEC thresholds for disclosing events of this nature.”
And Warner isn’t the only lawmaker pushing for increased cyber regulations. Earlier this month, New York Governor Andrew Cuomo (D-NY) announced proposed cybersecurity regulations to increase the responsibility of banks and insurance to protect their information systems and customer information. The regulations, if instated, would apply to companies regulated by the New York Department of Financial Services (NYDFS) and would require them to—among other steps—establish a cybersecurity policy and incident response plan. Companies would also have to notify the NYDFS within 72 hours of any cyber event that is likely to affect operations or nonpublic information.
The Boardroom Response
Any company—whether public, private, or nonprofit—can fall prey to a breach, and even companies with formal cybersecurity plans can find themselves the victims of a breach. Preliminary data from the 2016-2017 NACD Public Company Governance Survey show what corporate directors are already doing to oversee cyber-related risks.
When asked which cybersecurity oversight practices the survey respondents’ boards had performed over the past 12 months—and directors could select multiple answers—the most common responses included:
Reviewed the company’s current approach to protecting its most critical data assets (76.6%)
Reviewed the technology infrastructure used to protect the company’s most critical data assets (73.6%)
Communicated with management about the types of cyber-risk information the board requires (64.4%)
Reviewed the company’s response plan in the case of a breach (59.3%).
“Corporate directors should ask management for an accurate and externally validated report on the state of the organization with respect to cyber risk,” said Robert Clyde, a board director for ISACA, which is a global IT and cybersecurity professional association, and White Cloud Security. “They should also ask what framework is being followed for IT governance.”
Aside from high-profile breaches of emails and email providers, Clyde says that breaches related to ransomware are increasing.
“Ransomware encrypts data that can only be decrypted by paying the attacker a fee in Bitcoins. According to the NACD Cyber-Risk Oversight Handbook and many other organizations, the key control to reduce the risk of attack—including ransomware—is restricting user installation of applications, called ‘whitelisting’ or ‘Trusted App Listing,’” Clyde said. “Yet this highly recommended control is rarely implemented. Boards should ask organizations for their plans to implement this specific control.”
NACD recently announced a new online cybersecurity learning program for directors. The multi-module course aims to enhance directors’ understanding of cybersecurity, and the difference between the board’s and management’s responsibilities related to cyber risks. Participants in the program, which is the product of partnership between NACD, Ridge Global, and the CERT Division of Carnegie Mellon University’s Software Engineering Institute, will work through a cyber-crisis simulation and take a comprehensive exam. Successful completion of the program will earn the participant a CERT Certificate in Cybersecurity Oversight.
The dust settled recently on another chapter of the Target Corp. data breach litigation. Although the five shareholder derivative lawsuits filed against Target’s officers and directors have been dismissed, they underscore the critical oversight function played by corporate directors when it comes to keeping an organization’s cyber defenses up to par. While the ink isn’t quite dry on the court papers, it’s time to start reflecting on the lessons of the skirmish.
In the midst of the 2013 holiday shopping season, news leaked that hackers had installed malware on Target’s credit card payment system and lifted the credit card information of more than 70 million shoppers. That’s almost 30 percent of the adult population in the U.S.
Predictably, litigation was filed, regulatory and congressional investigations commenced, and heads rolled. Banks, shareholders, and customers all filed lawsuits against the company. Target’s CEO was shown the door.
And Target’s directors and officers were caught in the crossfire. In a series of derivative lawsuits, shareholders claimed that the retailer’s board and C-suite violated their fiduciary duties by not providing proper oversight for the company’s information security program, not making prompt and accurate public disclosures about the breach, and ignoring red flags that Target’s IT systems were vulnerable to attack.
The four derivative cases filed in federal court were consolidated (one derivative lawsuit remained in state court) and Target’s board formed a Special Litigation Committee (SLC) to investigate the shareholders’ accusations. The SLC was vested with “complete power and authority” to investigate and make all decisions concerning the derivative lawsuits, including what action, if any, would be “in Target’s best interests.” Target did not appoint sitting independent directors but retained two independent experts with no ties to the company—a retired judge and a law professor. The SLC conducted a 21-month investigation with the help of independent counsel, interviewing 68 witnesses, reviewing several hundred thousand documents, and retaining the assistance of independent forensics and governance experts.
On March 30, 2016, the SLC issued a 91-page report, concluding that it would not be in Target’s best interest to pursue claims against the officers and directors and that it would seek the dismissal of all derivative suits.
Minnesota law, where Target is headquartered, provides broad deference to an SLC. Neither judges nor plaintiffs’ are permitted to second-guess the SLC members’ conclusions so long as the committee’s members are independent and the SLC’s investigative process is ‘adequate, appropriate and pursued in good faith.” By these standards, U.S. District Judge Paul A. Magnuson recently dismissed the derivative cases with the “non-objection” of the shareholders, subject to their lawyers’ right to petition the court for legal fees.
Target isn’t the only data-breach-related derivative case filed by shareholders against corporate officers and directors. Wyndham Worldwide Corp.’s leadership faced derivative claims relating to three separate data breaches at the company’s resort properties. After protracted litigation, the derivative claims were dismissed in October 2014, in large measure because Wyndham board’s was fully engaged on data security issues and was already at work bolstering the company’s cybersecurity defenses when the derivative suit was filed. A data-breach-related derivative action was also filed against the directors and officers of Home Depot, which remains pending.
Despite the differences between the Target and Wyndham derivative suits, both cases contain important lessons for corporate executives and sitting board members.
Treat data security as more than “just an IT issue.” Boards must be engaged on data security issues and have the ability to ask the right questions and assess the answers. Board members don’t know what they can’t see. Developing expertise in data security isn’t the objective; rather, it’s for directors to exercise their oversight function. Board members can get cybersecurity training and engage outside technical and legal advisors to assist them in protecting their organizations from data breaches.
Evaluate board information flow on cybersecurity issues. How are board members kept up-to-date on data security issues? Are regular briefings held with the chief information officer (CIO) to discuss cybersecurity safeguards, internal controls, and budgets? Boards might also consider appointing special committees and special legal counsel charged with data security oversight.
Prepare for cyberattacks in advance. Boards should ask tough questions about their organization’s state of preparedness to respond to all aspects of a cyber-attack, from reputational risk to regulatory implications. Get your house in order now, and not during or after an attack. Not surprisingly, multiple studies—including the Ponemon Institute’s 2016 Cost of Data Breach Study—suggest that there is a correlation between an organization’s up-front spending on cybersecurity preparation and the ultimate downstream costs of responding to a breach.
Decide whether and when to investigate data breaches. Before hackers strike, boards must decide whether and when to proactively investigate the breach, wait to see if lawsuits are filed, or wait to see if regulators take notice. Regardless, boards should be prepared to make this difficult decision, which will establish the tone of the company’s relationship with customers, shareholders, law enforcement, regulators, and the press.
Develop a flexible cyber-risk management framework. Cyber-risk oversight isn’t a one-time endeavor, nor is there a one-size-fits-all solution. The threat environment is constantly changing and depends, in part, on a company’s sector, profile, and type of information collected and stored. While cyber-criminals swiped credit card data in the Target and Wyndham cases, the threat environment has escalated to holding organizations hostage for ransomware payments and stealing industrial secrets.
Cybercrime is scary and unpredictable. It poses risks to a company’s brand, reputation, and bottom line. Board members are on the hot seat, vested with the opportunity and responsibility to oversee cybersecurity and protect the company they serve.
Craig A. Newman is a litigation partner in Patterson Belknap Webb & Tyler LLP and chair of the firm’s Privacy and Data Security practice. He represents public and private companies, professional service firms, nonprofits institutions and their boards in litigation, governance and data security matters. Mr. Newman, a former journalist, has served as general counsel of both a media and technology consortium and private equity firm.
I watched with interest as Senators Jack Reed (D-RI) and Susan Collins (R-ME) advanced bipartisan legislation that would require companies to disclose whether they have a director with cyber expertise on the board, and if not, why. Regardless of whether it passes, The Cybersecurity Disclosure Act of 2015 has apparently widened the door for shareholders and regulators to increase their pressure on boards and hold them more accountable for being proactive about understanding the company’s cybersecurity risk.
As someone who has witnessed the global cybersecurity battlefield at close range for over 14 years, I wholeheartedly agree that boards should increase their knowledge of cyber related risks and engage more proactively with the company’s strategy for mitigating them. Yet for boards to rise to Sen. Reed’s challenge that companies “have the capacity to protect investors and customers from cyber-related attacks,” it’s important to solve for the problem and not just the perception. Electing a cyber-expert to the board could certainly be helpful for companies. However, it may not be practical at this time. Nor does it solve for capacity.
No matter what risks they oversee, from financial to geopolitical, board members have an obligation to avail themselves of the right information to make informed decisions that safeguard shareholder value. This is no less true of cybersecurity risk. In order to empower an effective security program, the board should seek the right information and expertise on which to base its decisions about tolerance, investment, policy, and practice. That information includes but is not limited to: a solid understanding of the threats, the results of a well-prepared cybersecurity risk assessment, a roadmap that articulates desired outcomes and metrics for monitoring effectiveness.
Companies are trying to answer the questions: “How do we know if we’re making a reasonable and appropriate effort to mitigate these risks?” and “How do we measure and rationalize our security investment in the context of corporate strategy and risk tolerance?” I believe boards and their committees should oversee the cyber risk similar to the way the audit process manages financial risk.
Seek a balanced view of Information Technology (IT) security and IT enablement. Give both sides adequate time on the boardroom agenda at each meeting. You’ll gain insights on how strategic initiatives add risk so they are addressed earlier with less disruption, but you’ll also have the added benefit of exploring how security can enable those initiatives.
Ask whether the cybersecurity program has early warning capabilities that reduce time-to-respond. And if not, ask when to expect them. The goal is resilience, not the elimination of risk. Defense is not the endgame. The goal is to reduce the time it takes to detect and respond to the threats targeting your company’s digital assets. Early response is the cornerstone of mitigating risk and damage. Boards should ask if there is a one to three year roadmap for achieving an early warning system that increases visibility and applies threat intelligence to existing solutions, at a minimum, for a more proactive security posture.
Be sure that specific “point solutions” are not confused with the company’s cybersecurity strategy. New technology solutions may be necessary, but being resilient against the threats will depend on how those solutions are integrated, managed and governed as a whole. Ask your cybersecurity officer “what are the desired outcomes?” and “what is the roadmap for getting there?” It’s better to crawl-walk-run toward a well-integrated, manageable program than to jump at every new solution. It’s not about how many “boxes” are deployed to stop the adversary. It’s about how well you’re organized for the fight.
Seek the right threat and risk monitoring dashboard. Security officers with a proactive security program in place should be able to answer: are there threat actors in our systems now? If the answer is no, how can we be sure? and “How do we know they’re there?” Another important metric to monitor is how well the company is improving its “time to respond” to incidents.
And finally, seek third party input and intelligence to aid informed decision-making. Cybersecurity risk is asymmetric, so any security program that provides early warning is going to need threat insights beyond a company’s own experience to date. The right security expertise can help you identify your most likely threats based on global threat intelligence gathered from outside the company’s own limited experience. A third party can also help your security team assess the effectiveness of its current posture against those real-world threats by simulating the attacks. With capabilities in place to anticipate the real threats and prioritize effort, you can greatly expand the security program’s capacity and effectiveness.
It’s inevitable that more and more board members will come to the table with a working knowledge of IT enablement and IT security over time. But for now, boards can take a more proactive and knowledgeable stance by: seeking equal input from IT security and IT enablement leaders; leveraging third party threat intelligence and expertise; and monitoring the company’s progress toward a stronger security posture with “early warning” capabilities that mitigate risk with faster response. These measures go beyond the appearance of “prioritizing” cybersecurity. They add up to tangible improvements in risk mitigation on behalf of all the company’s stakeholders.
Mike Cote is CEO of SecureWorks, a global cybersecurity services firm that provides an early warning system for evolving cyber threats, enabling organizations to prevent, detect, rapidly respond to and predict cyberattacks. SecureWorks minimizes risk and delivers actionable, intelligence-driven security solutions for more than 4,200 clients in 59 countries.