Cyber security risk
May 2015 | SPECIAL REPORT: OPERATING AN EFFECTIVE BOARD
Financier Worldwide Magazine
The threat of a cyber attack is more immediate now than ever. This past year alone has seen high profile attacks on numerous organisations, ranging from blue chip companies to government departments, often with devastating consequences such as service interruption, loss of confidential information or intellectual property, compromise of personal information, breach of law or contract, regulatory investigation and action (including fines), as well as significant reputational and brand damage. In a recent high profile case, the chief information officer and chief executive of a major US retailer resigned in the aftermath of a serious breach that resulted in the loss of personal and credit card information.
And that is before even factoring in the cost of interruption to business as usual and dealing with a high profile security incident, remediating the security flaws that led to the breach and dealing with regulators, affected persons and the press. There are numerous studies on the financial consequences of major cyber attacks and data breaches. For instance, according to one study the estimated annual cost to the global economy from cyber crime is more than $400bn (a conservative estimate would be $375bn in losses, while the maximum could be as much as $575bn) (McAfee Cybercrime Report, June 2014). Another study reports that over the course of a year the average cost of cyber crime climbed by more than 9 percent to $12.7m for companies in the US, up from $11.6m in 2013 (HP Report, 2014). Furthermore, the average time to resolve a cyber attack is also rising, climbing to 45 days, up from 32 days in 2013 (HM Government, Cyber Security: balancing risk and reward with confidence, Guidance for Non-Executive Directors, December 2014).
This article addresses the risks associated with cyber and data security and the steps directors can take to mitigate the risks for their companies.
What is cyber and data security about?
Cyber and data security refers to the technical and organisational measures a company should put in place to mitigate the risks to its data and information systems. There are two main reasons why companies must take such measures: first, in order to protect their own confidential and proprietary information, and second, to satisfy legal obligations.
The extent of statutory obligations on cyber and data security depends on the type of company – any company that holds personal data (i.e., any information that relates to an identifiable individual) is under a legal obligation to apply appropriate security measures to protect that data. It should be noted that telecommunications companies and internet service providers are under additional obligations concerning the security of their networks and services and mandatory notification of security breaches.
Furthermore, the ongoing process of EU data protection and security law reform will introduce additional obligations for critical infrastructure operators and payment service providers, as well as higher expectations of compliance across the economy, with mandatory data security breach notifications, significant fines for compliance failures (potentially up to 5 percent of annual worldwide turnover) and mandatory regulatory audits for all companies that process personal data.
Why is it important?
Technology has revolutionised the way in which information is managed and stored, and as a result information now runs to the core of most companies. Information is embedded in every company, for instance through systems used for online sales to customers, employee and customer data, commercially sensitive information, logistics, operational systems or intellectual property. In addition, information (including personal information) is becoming an invaluable business asset for an increasing number of companies. This means that it can often be difficult to assess the real impact of a breach – an attack in one area of the business which is deemed less important could in fact have repercussions on another area which is significantly more important.
Modern ways of working mean that companies increasingly entrust third parties with the storage and processing of their information. For instance, the systems which hold employee or customer data may be hosted or backed up on the servers of providers of cloud-based services or outsourced to external IT providers. Employees frequently work from home or access information on their personal devices (such as mobiles and tablets). This means that as companies entrust the processing of more and more of their information on IT infrastructure that is outside their immediate control (such as third party servers and networks and employee owned devices), the idea of the ‘secure corporate IT perimeter’ is breaking down. However, obligations to protect the company’s information persist.
At the same time, companies are faced with skilled and determined adversaries, and a constantly evolving threat landscape. At any given time, there are new security vulnerabilities, new malware families or new configurations of existing malware which are exploited by different actors with motivations as diverse as spam and the theft of intellectual property, all the way through to activism, terrorism, espionage and cyber warfare.
As a result, for the vast majority of companies, the question is not if they will suffer a serious cyber attack or other data security incident, but when it will happen, how well their data security system (i.e., the set of policies, processes and operational security measures) will perform, and how effective the response to the incident will be. Put simply, a company that suffers a serious cyber attack that results in a data security breach wants to be able to say that the breach happened despite the company’s data security system, and not because of it.
What action can the board take?
A common misconception is that cyber security is a technical issue and should be left to information officers, information security and IT experts. However, cyber and data security is an interdisciplinary matter that requires board involvement, because of the fundamental role information plays in most companies and the potentially serious consequences of suffering a major data security breach. Data protection regulators increasingly expect to see evidence of board-level backing on information governance and cyber and data security. As a result, these matters are increasingly becoming business critical board level issues.
The board can approve budgets, allocate resources and appoint executives responsible for cyber and data security with the mandate to put in place measures to protect the company’s information, mitigate the risk and prevent potential financial loss, regulatory action and damage to the company’s reputation. Proactive management is incumbent in protecting against cyber threats and can help the company gain a competitive advantage against its competitors. The board can also appoint senior data security ‘champions’ and can ‘get behind’ relevant initiatives within the company, such as raising awareness and training the workforce.
It is vital to assess the risk of a cyber threat to the company and to determine vulnerable areas in existing systems and protocols. The board should, acting on expert advice, understand the company’s statutory and contractual obligations around data and cyber security, and assess the value of the systems or information to determine the amount of protection required. The board should also determine its risk appetite and how much it is prepared to invest. It is also necessary to appoint a member of staff who is accountable for cyber risks and assess whether there is sufficient separation from those who run the systems on a day-to-day basis. For instance, that person could be the head of information security or the head of IT.
Most of the work that is required to enable companies to satisfy legal obligations and meet expectations around cyber and data security should be done before an incident occurs. The overriding aim should be to get on top of the situation before the company suffers a data security breach. The key elements of such work include understanding legal obligations and regulatory approaches to cyber and data security, as well as the expectations of stakeholders such as customers and business partners. Companies should understand their information flows and data processing operations, as well as carry out and document a risk assessment on data processing systems. It is necessary to carry out due diligence on third parties that the company is seeking to engage to process data on its behalf. Companies should ensure that the company’s policies, processes and operational security measures are appropriate, and are in accordance with legal requirements. They should also move to address regulatory hotspots – there is a growing body of data security enforcement action cases that provides a clear indication about the expectations of regulators with regard to key aspects of data security such as the use of encryption, staff training, written policy framework and engaging service providers. Companies should create a clear incident management plan, with management roles and reporting lines, covering all aspects of a security incident from detection all the way through to remediation of the security vulnerabilities that resulted in the incident. Work must also be done to establish the company’s positions on data breach disclosures, as well as ensuring that cyber and data security remain on the agenda and that the company’s data security system is kept under regular review. Raising internal awareness and training the workforce must also be made a priority.
Importantly, regulators, investors, business partners or customers may seek assurances from the company that information is held securely and that cyber threats are treated seriously. Written reassurances in the company’s annual report could boost confidence and reputation. Proactively addressing the likely data security concerns of investors, business partners and customers may significantly increase deal speed and pre-empt more demanding requests.
Antonis Patrikios and Tim Bird are partners, and Sabba Mahmood is a solicitor, at Fieldfisher. Mr Patrikios can be contacted on +44 (0)20 7861 4354 or by email: firstname.lastname@example.org. Mr Bird can be contacted on +44 (0)20 7861 4031 or by email: email@example.com. Ms Mahmood can be contacted on +44 (0)20 7861 4023 or by email: firstname.lastname@example.org.
© Financier Worldwide
Antonis Patrikios, Tim Bird and Sabba Mahmood