Cybersecurity is more than a technological issue—it’s a business issue. In a BoardVision video moderated by Judy Warner—editor-in-chief of NACD Directorship magazine—Mary Ann Cloyd, former leader of PwC’s Center for Board Governance, and Zan M. Vautrinot, former commander of the Air Forces Cyber Command and current director of Symantec, Ecolab, and Parsons Corp., discuss effective cyber-risk oversight, addressing the following questions:
How can boards communicate with management about cyber risk?
How does cyber risk fit into discussions about risk appetite?
Here are some highlights from that conversation.
Judy Warner: For directors, I think one of the greatest challenges around the issue of cyber is how to engage in an informed conversation with management. And how do they become informed about their oversight roles as they relate to cyber?
Zan Vautrinot: One of the things that was absolutely clear about the private sector and corporate leadership is that they understood how to have a discussion about risks and strategy. The only thing different with cyber is that some of the technology and some of the solution sets are slightly different, but the conversation is the same. It is a discussion about a particular kind of risk and how it relates to the kind of business you are [in].
Warner: Mary Ann, from your perspective, how does that conversation take place, or start to take place, at the board level? And is it a conversation for the full board or a specific committee?
Mary Ann Cloyd: I guess I always say it depends. I never want to be so prescriptive as to tell somebody what they need to do because every board and every committee is different. However, I do think that, given the magnitude of how this affects so many businesses, it’s not a technology issue. It’s a business issue. So, with that, where would you oversee any other business issue at your board? And I’m guessing that a lot of it would belong at the full board, with parts of it delegated down to a committee.
Warner: The NACD recently published a handbook on cyber-risk oversight, and one of the discussions is around risk appetite and where does cyber fit into that equation today. And I know, Mary Ann, you have said we need to think of cyber as any other risk.
Cloyd: I think you bring up two interesting things. [I]n fact, we did a small publication [at PwC’s Board Leadership Center] earlier this year, and we called it “Defining Risk Appetite in Plain English.” What prompted it was I had a director come to me and he said, “Mary, we’re doing our off-site strategy session and we always talk about risk appetite. Do you have a good pre-read that I could give to the board so that they can understand what risk appetite means?” So we did this to really put in plain English, in four pages or less, what the dialog is between management and the board, and how you develop and define your risk appetite. And, to me now—as you have so beautifully put this, Suzanne—cyber is just another part of that risk discussion and how it fits into your overall strategy.
Vautrinot: Right. And if you have already had a discussion about your strategy and those things that are most important to you as a corporate entity, is it the data that is unique that you’ve collected—the information and the access to that information—that makes your corporation unique? Is it the technology or your research and development? Is it your insight into financial transaction or merger and acquisition? Is it [about] manufacturing processes or distribution processes?
Every board and every management team knows what is most important to them being successful as a corporation. It is likely that those things are the areas that [the board] would want to focus on with assessing cyber risk. If you look at that area and say this is what is most important to us as a corporation, and this is the technology that we depend on to do that activity, now I can say that is sufficient or it is insufficient relative to the amount of risk I am willing to accept in that area. There may be other areas that aren’t core to the business, and so you are willing to accept a different amount of risk or put different systems in place that kind of sandbox it—[systems] that put a fence around, or that separate or provide different controls to allow [the lower-risk] activity to run more openly, whereas [higher-risk areas are] much more controlled and much more precious.
Consumers in the digital marketplace rarely think twice about allowing companies access to their personal information, and the companies that are amassing this data are enjoying the unprecedented business opportunities that such access entails. This exchange of information does, however, come with substantial liability risks; that information can easily fall into the wrong hands. This feature of the e-commerce landscape is causing both consumers and companies to ask: Is privacy dead in the Information Age? To explore this question, NACD Directorship Editor in Chief Judy Warner sat down with former White House Chief Information Officer and founder of consulting company Fortalice Theresa Payton during a Monday evening session at the 2015 NACD Global Board Leaders’ Summit.
In short, privacy isn’t dead, but our concept of privacy is undergoing a transformation. Payton said that as business leaders and consumers, we need to have serious conversations about what the new—and correct—lines of privacy are. “We own some responsibilities as business leaders and government officials,” she said. “Data is hackable and breaches are inevitable. Don’t aid and abet hackers.”
It turns out that companies are inadvertently aiding and abetting hackers. First, some organizations fall victim to their own, outdated view of building cyber defenses: Set up as big a firewall as you can around the company’s data assets; install anti-malware and antivirus software—done. This is a losing defensive strategy; it fails to take into account the mechanics of how and why these major breaches continue to happen.
According to Payton, companies with poor data hygiene are the most susceptible to cyberattacks. When companies kept analog files, they would shred records when storage space was exhausted or when data reached a certain age. In a digital environment, storage space is cheap and seemingly limitless, meaning that data could—and probably will—live on servers for years. As time goes on and a company reorganizes, data is forgotten, creating prime points of entry for hackers. Adopting a data-“shredding” strategy is imperative.
In addition, the tools needed to hack into a system have become both affordable and readily available. Now anyone can be a hacker—and those who have chosen this path grow more adept at their craft every day. Taken altogether, this is a recipe for potential disaster.
Payton outlined best practices for maintaining optimal data hygiene:
Don’t keep all of your data in one place. For data you need to retain, “segment it to save it.” In other words, divide that information among multiple digital locations so that if one location is compromised, a hacker hasn’t gained access to the entirety of the data the company holds.
Create rules around when you no longer need data and set a schedule for “shredding” it.
“Shred” any data that you don’t need. Keep only data related to the attributes of consumer behaviors and get rid of the specifics (e.g., names and social security numbers). Doing so will reduce your risk of being held accountable when a breach happens.
Furthermore, she stressed that directors should be sure to ask certain questions as they work with management to hone the company’s cybersecurity strategies:
Have we identified our top critical assets—those that if held for ransom, lost, or divulged, would destroy us as a company?
Who has access to those assets? How do we grant access?
Have we drilled for a cyber breach disaster?
Do we have a liability plan that will cover the board should critical assets be breached?
If there is a single common denominator to many of the stories in this issue of NACD Directorship it is reason. And in matters pertaining to business disruptors, maintaining calm, cool objectivity is no easy task. Any discussion of this subject oftentimes elicits an emotional response. Disruption is typically considered a negative force, prompting apprehension and, sometimes, outright fear.
Take shareholder activism, which is a potentially disruptive force in any boardroom. Statistics tell part of how this story is playing out: The number of activist campaigns has increased 60 percent since 2010, according to Factiva, and activist funds control northward of $130 billion in assets, per Hedge Fund Research. Not so long ago, passive index investors like Vanguard depended largely on the proxy advisers to inform their voting, but that too has changed.
Corporate attorney Martin Lipton recently described a “new governance paradigm” by which major investors like BlackRock and Vanguard take their activism in-house, making our interview with McNabb ever more timely. “It is not likely that activism and short-termism will totally disappear,” Lipton wrote in a client memo in June and reiterated in a speech at the World Economic Forum in August, “but I’m comfortable that the influence of major investors will be more favorable to shareholders generally and to the nation’s economy and society, than the self-seeking personal greed of hedge fund activists.”
Today, Vanguard owns at least 1 percent of every publicly traded company in the Fortune 1000. What it desires is nothing less than long-term success for those companies. And, what could be more reasonable than that?