Risk Insider: Carol Zacharias

Cyber Directors: Greater Expertise, Greater Liabilities?

By: | October 17, 2016 • 2 min read
Carol Zacharias is underwriting counsel to QBE North America, a multinational insurer. She has a master's degree in corporate law from New York University School of Law. She can be reached at Carol.Zacharias@us.qbe.com.

The World Economic Forum places cyber security ahead of terrorism as one of the top 10 economic threats to 140 countries. Cyber security risk in the corporate arena is the responsibility of the board.

As noted by the commissioner of the SEC, “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.”

Boards have taken up the charge. Cyber security has moved from 11th place to third place on board agendas according to the Lloyd’s of London “Biennial Risk Index” of 2011 and 2013.  The increased spending on cyber security protection by companies further supports this trend.

Will the cyber expert-director be held to a higher standard of care regarding cyber risk management?

According to Gartner Inc., companies spent $86 billion on protection efforts in 2015, which reflects an 18 percent increase from the prior year, and are expected to spend $94 billion in 2016.

Expertise

The issue becomes, how can a board address cyber risk complexities and meet its duty of care?

Congress proposes mandating cyber experience on boards. The Cybersecurity Disclosure Act of 2015 requires that public companies disclose whether the company has a director with cyber security experience or expertise, or disclose what cyber security steps it has taken that mitigate against acquiring board expertise.

At the same time, boards today are addressing cyber risk in one of several different ways.

Some address cyber security as a plenary board, receiving reports, engaging in discussions and making critical decisions as a whole. This can prove challenging due to the paucity of time at a board meeting and lack of board level cyber expertise.

Alternatively, boards may delegate cyber risk management to established audit committees. A committee forum provides greater time for analysis and expert consultation. However, audit committees are more likely to have financial rather than cyber expertise, and are more attuned to financial rather than technology and innovation issues.

Other boards create a cyber security committee or seek to add a cyber expert to the board itself. Either way, the board is seeking greater cyber expertise and experience at the board level.

Liability 

The issue becomes whether the cyber expert director has a higher risk of liability than fellow directors. Will the cyber expert-director be held to a higher standard of care regarding cyber risk management?

All corporate directors owe a fiduciary duty of care to the company and its shareholders. In executing their duty of care, the director must act in a manner that a reasonably prudent person would act under the circumstances.  A reasonable person means one with the expertise of the director in question. If a director has a particular expertise, skill or experience, they are expected to apply it.

Accordingly, the cyber expert-director could be held to a higher standard of care and diligence in reviewing cyber-related matters than a director without cyber expertise.

While no director can turn a blind eye to negligence, and while all directors must act with diligence and care in addressing cyber matters, the cyber expert-director will tenably be expected to act in a manner that a reasonably prudent cyber expert would act under the circumstances, conducting a diligent technical review and evaluation of cyber matters that a director without cyber expertise could not undertake.

More from Risk & Insurance

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2018 Risk All Stars

Stop Mitigating Risk. Start Conquering It Like These 2018 Risk All Stars

The concept of risk mastery and ownership, as displayed by the 2018 Risk All Stars, includes not simply seeking to control outcomes but taking full responsibility for them.
By: | September 14, 2018 • 3 min read

People talk a lot about how risk managers can get a seat at the table. The discussion implies that the risk manager is an outsider, striving to get the ear or the attention of an insider, the CEO or CFO.

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But there are risk managers who go about things in a different way. And the 2018 Risk All Stars are prime examples of that.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Goodyear’s Craig Melnick had only been with the global tire maker a few months when Hurricane Harvey dumped a record amount of rainfall on Houston.

Brilliant communication between Melnick and his new teammates gave him timely and valuable updates on the condition of manufacturing locations. Melnick remained in Akron, mastering the situation by moving inventory out of the storm’s path and making sure remediation crews were lined up ahead of time to give Goodyear its best leg up once the storm passed and the flood waters receded.

Goodyear’s resiliency in the face of the storm gave it credibility when it went to the insurance markets later that year for renewals. And here is where we hear a key phrase, produced by Kevin Garvey, one of Goodyear’s brokers at Aon.

“The markets always appreciate a risk manager who demonstrates ownership,” Garvey said, in what may be something of an understatement.

These risk managers put in gear their passion, creativity and perseverance to become masters of a situation, pushing aside any notion that they are anything other than key players.

Dianne Howard, a 2018 Risk All Star and the director of benefits and risk management for the Palm Beach County School District, achieved ownership of $50 million in property storm exposures for the district.

With FEMA saying it wouldn’t pay again for district storm losses it had already paid for, Howard went to the London markets and was successful in getting coverage. She also hammered out a deal in London that would partially reimburse the district if it suffered a mass shooting and needed to demolish a building, like what happened at Sandy Hook in Connecticut.

2018 Risk All Star Jim Cunningham was well-versed enough to know what traditional risk management theories would say when hospitality workers were suffering too many kitchen cuts. “Put a cut-prevention plan in place,” is the traditional wisdom.

But Cunningham, the vice president of risk management for the gaming company Pinnacle Entertainment, wasn’t satisfied with what looked to him like a Band-Aid approach.

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Instead, he used predictive analytics, depending on his own team to assemble company-specific data, to determine which safety measures should be used company wide. The result? Claims frequency at the company dropped 60 percent in the first year of his program.

Alumine Bellone, a 2018 Risk All Star and the vice president of risk management for Ardent Health Services, faced an overwhelming task: Create a uniform risk management program when her hospital group grew from 14 hospitals in three states to 31 hospitals in seven.

Bellone owned the situation by visiting each facility right before the acquisition and again right after, to make sure each caregiving population was ready to integrate into a standardized risk management system.

After consolidating insurance policies, Bellone achieved $893,000 in synergies.

In each of these cases, and in more on the following pages, we see examples of risk managers who weren’t just knocking on the door; they were owning the room. &

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Risk All Stars stand out from their peers by overcoming challenges through exceptional problem solving, creativity, clarity of vision and passion.

See the complete list of 2018 Risk All Stars.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at dreynolds@lrp.com.