2021 Vision: Best boardroom practices in digital and cybersecurity governance
November 6, 2020
By redefining the way they’re overseeing cybersecurity risk, an emerging group of high-profile companies is reducing the likelihood, costs and impacts of data breaches – while improving their ability to create value with digital technologies.
And not a moment too soon, because regulators are taking notice of corporate progress and effectiveness in cybersecurity risk oversight and management. Or, as the case may be, the lack of progress. More than 94 countries now have data privacy and protection laws in place[i]. Europe’s General Data Protection Regulation is entering its third year; the California Consumer Privacy Act went into effect on July 1, 2020.
As of October 2020, the GDPR had issued more than €550 million in fines since its inception in 2018[ii]. Notably, more than €335 million of these fines were related to “insufficient technical and organizational measures to ensure information security.”
Fortunately, these self-inflicted wounds are helping organizations recognize the importance of boardroom leadership on digital and cybersecurity risk. Boardrooms must lead in setting the digital and cybersecurity tone at the top, and they play a critical role in the effectiveness of every company’s cybersecurity system.
Multiple companies are starting to transform their boardrooms’ approach to overseeing the challenges and opportunities of the digital future. A few examples include Walmart[iii], Ford[iv] and Federal Express[v]. Here’s what they and others are doing to set the right digital and cybersecurity tone at the top.
Effective corporate governance must start with the directors’ ability to understand the issues and risks the organization is facing today and into the future. Cybersecurity risk is commonly viewed as one of the things that can go wrong with any digital business system, e.g., a data breach. But digital risk also encompasses the strategic opportunity risk of digital tools and how they can drive business value: If an organization isn’t aggressive enough in implementing new technology it is at risk of disruption from competitors.
Leading boardrooms have directors who comprehend both the upside and the downside risks. For these companies, the foundation of effective digital and cybersecurity corporate governance starts with corporate directors’ ability to oversee these issues properly. And it’s not just about asking questions. They also have a duty to question the answers they get. That’s why leading boards are adding and developing these abilities in their corporate directors.
There are two aspects to a director’s ability on these issues. First, organizations are adding corporate directors who have digital and cybersecurity competencies. Second, boards are developing and maintaining the digital and cybersecurity risk oversight abilities of their corporate directors through focused training.
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How the corporate board organizes itself is essential to effective governance. To that end, boardroom leaders are organizing their efforts through focused technology and/or cybersecurity committees. This is evidenced by the NACD 2019-2020 Public Company Governance Survey[vi], which shows that 5.4 percent of the Russell 3000 now has technology committees. In addition, 1.2 percent have cybersecurity committees. While these numbers may seem small, the trend is up – sharply. From the prior year, these numbers are up 20 percent and 70 percent respectively.
These boardrooms recognize that digital value creation and protection requires focus and time; a generalist approach here may not be sufficient. Thus, boards are rethinking their practices to, for example, have their audit committee oversee cybersecurity risk. Or they are tasking the full board with the digital oversight agenda.
A good example of a best corporate governance approach to this issue is Walmart. Its board created a Technology and eCommerce Committee that reviews and oversees “matters relating to information technology and systems and eCommerce.[vii]”
Research[viii] on the impact of boardroom committee structure and decentralizing critical oversight tasks identifies the following benefits of such boardroom committees:
Another benefit of a cybersecurity committee is the strong external signal this sends to investors, hackers and other stakeholders. The tradeoff of a committee is the potential for too many siloed specialists; however, boards adapt to this with multi-committee directors. For example, having an audit committee member also sit on the technology and cybersecurity committee.
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As Accenture’s Third Annual State of Cyber Resilience Research indicates, a group of leaders is emerging whose cybersecurity risk management practices differentiate their ability to mitigate risk. This elite group achieves results far better than most because it scales, trains, collaborates and innovates far differently.
It’s no different in the boardroom. Every boardroom has a critical role to play in how the company approaches, understands and mitigates cybersecurity risk throughout its business system. Risk is systemic when it exists within complex systems so deeply that it can threaten the entire organization. Since every digital business enterprise now employs complex systems, the risks are real, deep and growing – in part because of the pandemic but also because cybercriminals are becoming smarter and more sophisticated.
Systemic risk is a necessary perspective in enterprise risk management because it brings a wider view to the complexity that exists in every organization’s digital business system. When corporate boards embrace this view, directors have an advantage in understanding and overseeing the complex digital business systems that power their companies and put them at risk. Thus, systems thinking capabilities are becoming a competitive differentiator for high-performing directors and their corporate boards.
Recommended best practice
With a growing group of boardroom leaders taking steps now to redefine new standards and capabilities around digital and cybersecurity risk oversight, the bar has been set. Let’s all reach for it.
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[i] Global Data Governance, Foreign Policy Magazine, May 13, 2020, https://foreignpolicy.com/2020/05/13/data-governance-privacy-internet-regulation-localization-global-technology-power-map/
[ii] GDPR Enforcement Tracker, https://www.enforcementtracker.com/insights
[iii] Walmart Corporate Governance, https://stock.walmart.com/investors/corporate-governance/board-of-directors-committee-information/technology-and-ecommerce-committee/default.aspx
[iv] Charter of the Sustainability and Innovation Committee of the Board of Directors, https://corporate.ford.com/content/dam/corporate/us/en-us/documents/governance-and-policies/company-governance-sustainability-and-innovation-committee-charter.pdf
[v] Information Technology Oversight Committee Charter, https://investors.fedex.com/esg/board-of-directors/committee-charters/information-technology-oversight-committee-charter/default.aspx
[vi] NACD Public Company Governance Survey, NACD, December 11, 2019, https://www.nacdonline.org/insights/publications.cfm?ItemNumber=66566
[vii] Walmart Corporate Governance, https://stock.walmart.com/investors/corporate-governance/board-of-directors-committee-information/technology-and-ecommerce-committee/default.aspx
[viii] The Structure of Board Committees, Harvard Business School, November 2, 2016, https://hbswk.hbs.edu/item/the-structure-of-board-committees