Agenda Item #1 for the Next Board of Directors Meeting

Agenda Item #1 for the Next Board of Directors Meeting 1200 1200 Scott Kannry
Agenda Item 1 for the next board of directors meeting

Agenda Item #1 For The Next Board Of Directors Meeting

October 26, 2018

A Duty of Care for Cybersecurity

This past summer we witnessed various blue-chip firms like Maersk, Merck, FedEx and Mondelez, none of whom likely anticipated the reality of a major cyber event, all declare major impacts on operations and in some cases a resulting impact of hundreds of millions of dollars in losses.  The leaves are now falling and so are the executives as Equifax, with more almost certainly on the way, compensation clawbacks being discussed, and years of litigation ahead.  Most recently we’ve seen Deloitte suffer the exact fate that it proudly attempts to help thousands of clients avoid.  While all of these companies are different, they likely share a common thread of investing an incredible amount of money in security technology, employing many capable security professionals, and thinking that their losses would be insured.  Does anybody still believe that the current cybersecurity paradigm is working?

Cybersecurity should be at the top of every upcoming executive and board of directors meeting.  Rather it must be: the reality is that serious cyber events are inevitable, because technology is not failsafe, humans are fallible, and a host of other reasons in between.  But the appropriate discussions and retrospectives on these events should not be entirely focused on patching every single vulnerability and demanding at all costs that “something similar must never happen to us.” That is futile.

The right way to look ahead is to consider an alternative world for a company, where a serious event still occurs, but where management can explain to the board, shareholders, and customers that:

“We’re unfortunately announcing that we have suffered a major cyber event. Surely some painful days lie ahead for our business, but we’ll get through this. Please let me explain.

The event that we’re experiencing is one that we knew was possible. Our reliance on technology runs so deep that eliminating this type of scenario could only have been accomplished by shutting down the business. So we built a cybersecurity strategy around the very possibility that this type of loss scenario could materialize. We’re happy to show you how we executed that strategy, why we invested is certain capabilities versus others, and why, despite having suffered this event, we were confident in the maturity of our cybersecurity program.

Most importantly, because we knew that this scenario, and the magnitude of it, was possible, we’ve constantly been evolving and testing a response plan that you will now see in action, backed by a comprehensive and large dollar limit insurance program that we anticipate will pay for most, if not nearly all, of the costs and liabilities that result. We’re not naïve to know that there are not painful days ahead and that this will cost a lot of money, but we are confident that we will weather the storm.”

None of the aforementioned companies have taken such a position.  If any had, it would have been less likely for individuals to lose jobs, long term liabilities to materialize, trust could more quickly be regained, and executives, directors, and officers would be able to evidence an approach that should meet a ‘duty of care’ test.

Sadly, most companies can’t come anywhere close to meeting that test.  Why?  Because the current approach to cybersecurity is fatally flawed.  Companies blindly rely on assessments and let their guard down until next year after all of the recommendations have been implemented.  Those very recommendations are based almost entirely on threats and vulnerabilities ranked “high” because what consultant is willing to rank something low and risk that they are wrong? Insurance is bought typically not by attempting to understand actual exposure in dollars and cents, but by asking what your frenemies are buying.  Security folks speak an entirely different language than risk management folks than do executives and Boards of Directors.  When that’s the current reality the Tower of Babel stands no chance of even being started.

The good news is that entirely changing the paradigm is not that difficult and only requires three and half components:

  1. Understand your exposure, in financial terms.  Start by asking one question: “If a cyber event happens to us, what might it look like?”  Generate some scenarios based on what you do, how you use technology and what the impact of that technology failing might be.  Could there be a data breach? Could there be an interruption in systems? Could somebody dupe one of our treasury folks into wiring money to a fraudulent account? Could a hack into our process control technology cause tangible damage and bodily injury?  Now take a sampling of scenarios, get various operational and functional folks around a table and use their collective knowledge to estimate the cost of those events materializing.  It might lack engineering precision but it’s an important start. The exercise is successful 99% of the time, with the 1% attributable to the company who believes the guy or gal that stonewalls the process with the inevitable “That is totally impossible.”
  2. Utilize a maturity based cyber evaluation framework and align it with the scenarios that you’ve quantified in step one.  Why maturity based?  Because that approach recognizes that cyber risk is dynamic and managing it is a 24/7 endeavor.  Compliance frameworks and standards on the other hand, won’t ever go away, but all too often produce a fall sense of confidence once the checklist is complete and compliance framework met.  And why align the methodology with the scenarios?  Because that is the only way to prioritize the universe of tens of thousands of technologies and controls that all claim to be the silver bullet and solve the latest vulnerability.  The current paradigm ranks everything “high” and “critical;” the new paradigm says to focus first on the high cost scenarios that would be the most impactful, and work down from there.
  3. Maintain the resources and financial ability to recover from a meaningful event.  At the end of the day, everything translates into financial terms. Strive to maintain the right balance of financial reserves and insurance to pay for as much or all of the forensics costs, notification requirements, lost revenue, stolen funds, legal fees and liabilities, repair costs or replacement of damaged assets, and others.  How do you get there?  See Step One.
  4. (3.5) Benchmark against peers when possible.  Cyber risk management is a shared responsibility and in a world where standards and certifications can only provide a floor, the rising tide dynamic is the only means to stay as close to, or as ahead of the curve as possible.  All of the aforementioned components contribute to that dynamic: Are you as good as, or ideally better than, the median marker for the maturity of your cyber program, what’s at risk from an exposure standpoint, and if you have appropriate abilities and financial resources to recover from an event.

Put it all together and you can confidently and continuously validate that you are meeting your duty of care for managing cyber risk: “We understand our exposure, we’re managing the risk as effectively as possible, we have the ability and financial resources to recover from an unfortunate event.”

Summary

This past summer we witnessed various blue-chip firms like Maersk, Merck, FedEx and Mondelez, none of whom likely anticipated the reality of a major cyber event, all declare major impacts on operations and in some cases a resulting impact of hundreds of millions of dollars in losses.  The leaves are now falling and so are the executives as Equifax, with more almost certainly on the way, compensation clawbacks being discussed, and years of litigation ahead.  Most recently we’ve seen Deloitte suffer the exact fate that it proudly attempts to help thousands of clients avoid.  While all of these companies are different, they likely share a common thread of investing an incredible amount of money in security technology, employing many capable security professionals, and thinking that their losses would be insured.  Does anybody still believe that the current cybersecurity paradigm is working?

Scott Kannry

Scott Kannry

Scott M. Kannry is the Chief Executive Officer of Axio.

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