Australia: Cyber resilience for directors: The bar is only getting higher

IN BRIEF - ASIC PROVIDES IMPORTANT GUIDANCE FOR MANAGING CYBER RISKS

Potential risks from cybercrime and other cyber attacks, the increased dependence upon digital information and information held by companies, and ASIC's increased vigilance mean that directors can no longer afford to delegate responsibility to an IT department. Directors are expected to address this at a board level and have a sound awareness of their cyber security risks, as well as the laws governing their duties and responsibilities.

NAVIGATING THE "KNOWN UNKNOWNS" IN AN EVER-CHANGING DIGITAL AGE

We live in a brave new world where businesses are becoming increasingly dependent upon digital information for prosperity and economic growth. In Australia, consumers and businesses alike are rapidly adopting new technologies at an ever increasing pace. Terminology and jargon once relegated to an arcane world confusing to the lay person is now mainstream and part of many school curriculums. Digital disruption, the dark web, digital bitcoins, botsourcing, telepresence, augmented and virtual reality, cloud storage, machine learning, distributed ledgers, and the internet of things are now commonplace language, if not yet ubiquitous.

The challenges of navigating this transition are great with individual, corporation, governmental and societal adjustments non-trivial. The impact of these adjustments will be felt by everyone, including directors who hold special responsibilities. The speed of various aspects of the transition are difficult to predict, but it is apparent that our world will be a different place 10 years from now. An awareness of the inevitable changes ahead and an acknowledgement of what Donald Rumsfeld described as the known unknowns will help build some understanding of their implications. This article attempts to build a greater appreciation of these challenges for directors and serves as a starting point at raising awareness.

CYBER SECURITY BREACHES CONTINUE TO SHAKE CUSTOMER CONFIDENCE

Despite the economic importance of the cyber environment for companies seeking to obtain a competitive advantage over their competitors and in meeting the expectations of a tech savvy generation of consumers, the frequency and severity of malicious cyber attacks has grown exponentially in recent years. The Centre for Strategic and International Studies states in its Net Losses: Estimating the Global Cost of Cybercrime - Economic Impact of Cybercrime II report that that the estimated annual cost of cyber attacks to the global economy now exceeds $400 billion (page 2), and others, such as Cybersecurity Ventures, warn that within four years the cost of cybercrime will exceed $6 trillion globally.

Only the most distracted of directors would fail to have noticed daily headlines decrying the role of cyber meddling in the recent US elections, cyber extortion in well publicised ransomware attacks, like WannaCry and Petya, on major corporations and governments, and closer to home - the cyber intrusions which affected the Australian Bureau of Statistics census leaving many citizens distrustful of on-line security and government promises.

Clearly a cyber attack can affect any of us at any time with cyber criminals becoming more cunning. As recent events have focussed worldwide attention, the threat environment is constantly changing and it is clear that cyber risk is here to stay. It can undermine businesses, erode investor and consumer confidence, and impact our economy. In response, the Commonwealth Government has recently announced the National Cyber Security Strategy and allocated $240 million over four years to safeguard against criminality, espionage, sabotage and unfair competition online.

Industry research has revealed that over 60% of customers would stop using a company's products if a cyber attack resulted in a known security breach. These are the contemporary realities company directors now find themselves dealing with.

Ignorance, complacency, lack of diligence, and a mistaken view where responsibility to manage these risks is relegated to the IT department are no longer acceptable attitudes of a contemporary board. ASIC's recent 2016 surveillance program has identified a clear need for improvement in risk management systems, compliance and has noted that cyber resilience is now widely regarded as one of the most significant concerns for the financial services industry. Directors are now "on the hook" more than ever and continuous focus and diligence must be at the top of every board's agenda.

IN MANAGING CYBER RISKS, WHAT ROLE ARE DIRECTORS EXPECTED TO PLAY AND WHAT ARE THEIR DUTIES AND RESPONSIBILITIES AT LAW?

At the most general level, effective corporate governance involves active engagement by directors and the whole board in managing cyber risks. Common to many industries, effective cyber resilience requires leadership, resources, development of effective and adaptive strategies, and a comprehensive and long-term commitment to cyber resilience embedded in enterprise-wide culture.

ASIC suggests that directors need to specifically ask:

• how cyber risks may impact on your director's duties and annual director report disclosure requirements
• whether you have appropriate board-level oversight of cyber risks and cyber resilience, and
• has a consideration of cyber risks been incorporated into your governance and risk management practices, and controls and measures for managing those risks?

Cyber resilience is an organisation's ability to prepare for and respond to a cyber attack and continue operation during, or quickly adapt and recover from a cyber attack. Resilience is more than just preventing or responding to an attack, it also takes into account the ability to adapt and recover from such an event.

LAW GOVERNING DIRECTORS' CYBER DUTIES

At present, Australia does not have specific legislation governing cyber security in contrast to the broad data protection legislation in Europe, China and Israel, and the sectoral approach adopted by the USA. However, with the introduction of changes to the Privacy Act 1988 (Cth) (the Privacy Amendment (Notifiable Data Breaches) Act 2017 (Cth) (Data Notification Law) will take effect from 22 February 2018) affecting mandatory reporting of certain breaches to personal information, that situation is starting to change.

These changes stipulate that companies must take "reasonable steps" to protect personal information they hold from misuse, interference, loss, unauthorised access, modification or disclosure, and are expected to have significant practical consequences for many businesses. These cyber risks extend to the supply chain of a business and the privacy regulator expects companies to take steps to ensure third party compliance of the company's own Privacy Act obligations, such as for outsourced services and contractors.

In addition, ASIC have now made clear that a number of duties and responsibilities stemming from the general law now incorporate cyber security dimensions and suggest that directors face personal liability for failing their cyber security obligations. The general laws governing directors' duties and responsibilities come from three areas:

1. common law
2. Corporations Act 2001 (Cth), and
3. company's constitution

One such duty, the duty to exercise your powers and duties with care and diligence, features significantly under the common law, and is reinforced under section 180(1) of the Corporations Act. Section 180(1) provides that a director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

1. were a director or officer of a corporation in the corporation's circumstances; and
2. occupied the office held by, and had the same responsibilities within the corporation as a director or officer.

The reference to a reasonable person indicates an objective standard of care, consistent with the development of the equivalent fiduciary duty. The foreseeable risk of harm is balanced against the potential benefits that could reasonably have been expected to affect the company from the conduct in question. The court also takes into account the subjective elements of the position of an officer and the particular circumstances of the relevant corporation in assessing whether the duty has been breached.

In its Report 429 Cyber resilience: Health check, ASIC claims that these obligations on company directors and officers to discharge their duties with care and diligence extend to cybersecurity and have signalled increased regulatory scrutiny of this issue with a cybersecurity taskforce.

DISCLOSURE REQUIREMENTS REGARDING CYBER RISKS AND RESILIENCE UNDER THE CORPORATIONS ACT

Additionally, under the Corporations Act, several companies have obligations of disclosure in annual reporting, disclosure requirements to investors, and immediate disclosure of "market sensitive information" for listed entities.

Directors of listed entities must ensure annual disclosure of material business risks that could adversely affect the achievement of the financial performance or financial outcome described. Cyber risks and resilience may need to be taken into account in an assessment of these material business risks.

Cyber risks may also impact on directors' disclosure requirements to investors. A prospectus or information statement requires disclosure of relevant information that may affect an investor's decision, including the nature of the risks of investing in the securities. Directors may consider whether cyber risks form part of information investors and their advisers would reasonably require to assess any offer, and should be disclosed in a prospectus.

For listed entities, directors must immediately disclose "market sensitive information" to the market operator once they become aware of such information. As a result, directors need to consider how and when a cyber attack may need to be disclosed as "market sensitive information". How directors can better manage their cyber resilience responsibilities

Given the potential risks from cybercrime and other cyber attacks, it is recommended that boards and directors should increase their diligence and:

1. enquire of management and become fully aware of the scope of information that the business holds and manages
2. gain an understanding of the practical and legal significance of that information
3. partake in ongoing professional development to better equip yourself for the cyber challenges ahead. A useful starting point is ASX's Cyber Health Check Report
4. determine whether your industry is subject to any specific rules or regulations that control the way you collect and use that information (eg health services in relation to sensitive information)
5. gain an understanding of your IT systems, where information is located (data sovereignty), and the strategy behind the design of the system, and its strengths and weaknesses
6. determine what controls are in place and the strategy for preventing unauthorised access to company information. Controls include physical security, technical measures, awareness training and cultural practices
7. determine the extent to which your cyber security compliance obligations are extended and monitored with third-party suppliers and contractors, and
8. in the possibility of a security breach, understand your breach response plan to systematically manage the issues and risks, assess the loss, preserve the forensic evidence, have a communication strategy for dealing with customers, employees and the regulator, and steps to prevent ongoing damage

In its recent Report 468: Cyber Resilience Assessment - ASX Group and Chi-X Australia Pty Ltd, ASIC recommends boards opening a richer dialogue about cyber resilience by engaging senior leadership with a number of questions, including:

1. Are cyber risks an integral part of the organisation's risk management framework?
2. How often is the cyber resilience program reviewed at the board level?
3. Does the board need further expertise to understand the risk?
4. What needs to occur in the event of a breach?

Hopefully your organisation may never experience a data breach, however, an awareness of and prior preparation can provide a source of competitive advantage over your competition and will in any case be increasingly expected by your customers. Dealing with the consequences of a data breach can be devastating and an overwhelming distraction for management.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.