While attending the "Cyber Risks and the Boardroom" Conference at the New York Stock Exchange on Tuesday, June 10, 2014, U.S. Securities and Exchange Commissioner Luis Aguilar called on corporate boards to make sure they are taking the necessary steps to address and oversee their companies’ cybersecurity risks. In a prepared statement, he said that ensuring the adequacy of a firm’s cybersecurity measures “needs to be a critical part of a board of directors’ risk oversight responsibilities.” He said that “(e)ffective board oversight of management’s efforts to address these issues is critical to preventing and effectively responding to successful cyber-attacks and, ultimately, to protecting companies and their consumers, as well as protecting investors and the integrity of the capital markets.”

During his remarks, Commissioner Aguilar reviewed a number of recent high profile data breaches which generated media attention and raised public awareness about the issue:

  • The October 2013 cyber-attack on the software company Adobe Systems, Inc., in which data from more than 38 million customer accounts was obtained improperly;
  • The December 2013 cyber-attack on Target Corporation, in which the payment card data of approximately 40 million Target customers and the personal data of up to 70 million Target customers was accessed without authorization;
  • The January 2014 cyber-attack on Snapchat, a mobile messaging service, in which a reported 4.6 million user names and phone numbers were exposed;
  • The sustained and repeated cyber-attacks against several large U.S. banks, in which their public websites have been knocked offline for hours at a time; and
  • The numerous cyber-attacks on the infrastructure underlying the capital markets, including quite a few on securities exchanges.

In addition to the frequency of the attacks, Commissioner Aguilar expressed concern that the attacks have become increasingly expensive to victim companies. He cited one 2013 survey indicating that the average annualized cost of cyber-crime to a sample of U.S. companies was $11.6 million per year, representing a 78% increase since 2009. He noted that the costs were not restricted to direct economic loss, but included reputational harm that significantly affects a company’s bottom line.

The role of board oversight in cybersecurity came into sharp focus late last month when a prominent proxy advisory firm urged the ouster of seven of Target Corporation’s ten directors for failing to protect the company from a high-profile data breach that compromised 40 million credit cards. Commissioner Aguilar stated that “one would expect that corporate boards and senior management universally would be proactively taking steps to confront these cyber-risks.” He cited to one report indicating that boards are not spending enough time or devoting sufficient corporate resources to addressing cybersecurity issues. He suggested that boards should be more involved in reviewing annual budgets for privacy and IT security programs, assigning roles and responsibilities for privacy and security, and receiving regular reports on breaches and IT risks.

While expressing concern about the lack of board involvement in cybersecurity issues, Commissioner Aguilar offered suggestions for enhancing cybersecurity measures. He noted that the National Institute of Standards and Technology (NIST) released the Framework for Improving Critical Infrastructure Cybersecurity in February 2014. The NIST Cybersecurity Framework is intended to provide companies with a set of industry standards and best practices for managing their cybersecurity risks. The Framework encourages companies to proactively prepare for and manage cybersecurity risks. As we predicted in our advisory on the release of the Framework, and as Commissioner Aguilar noted, although the Framework is structured to provide voluntary guidance for any company, it is likely to become a baseline for corporate best practices and assessing the extent of exposure to legal or regulatory liability for cybersecurity shortcomings or for insurance coverage purposes. He stated, however, that the Framework will be “a bible without a preacher if there is no one at the company who is able to translate its concepts into action plans.”

Commissioner Aguilar also stated that there is no “one-size-fits-all” approach to preparing for or responding to cyberattacks, but strongly encouraged boards to invest time and resources into developing an incident response plan consistent with best practices for companies in the same industry. He concluded his remarks by stating that “board oversight of cyber-risk management is critical to ensuring that companies are taking adequate steps to prevent, and prepare for, the harms that can result from such attacks. There is no substitution for proper preparation, deliberation, and engagement on cybersecurity issues. Given the heightened awareness of these rapidly evolving risks, directors should take seriously their obligation to make sure that companies are appropriately addressing those risks.”

Sean B. Hoar