Increasing Risk Complexity Outpaces ERM Oversight

More organizations are recognizing the value of a structured focus on emerging risks. The number of organizations with a complete enterprise risk management (ERM) program in place has steadily risen from 9% in 2009 to 28% in 2016, according to the N.C. State Poole College of Management’s survey “The State of Risk Oversight: An Overview of Enterprise Risk Management Practices.”

Yet this progress may lag behind the increasingly complicated risks that need addressing. Of respondents, 20% noted an “extensive” increase in the volume and complexity of risks the past five years, with an additional 38% saying the volume and complexity of risks have increased “mostly.” This is similar to participant responses in the most recent prior years. In fact, only 2% said the volume and complexity of risks have not changed at all.

Even with improvements in the number of programs implemented, the study—which is based on responses of 432 executives from a variety of industries—found there is room for improvement. Overall, 26% of respondents have no formal enterprise-wide approach to risk oversight and currently have no plans to consider this form of risk oversight.

Organizations that do have programs continue to struggle to integrate their risk oversight efforts with strategic planning processes. “Significant opportunities remain for organizations to continue to strengthen their approaches to identifying and assessing key risks facing the entity especially as it relates to coordinating these efforts with strategic planning activities,” the researchers found.

According to the study:

Many argue that the volume and complexity of risks faced by organizations today continue to evolve at a rapid pace, creating huge challenges for management and boards in their oversight of the most important risks. Recent events such as Brexit, the U.S. presidential election, immigration challenges, the constant threat of terrorism, and cyber threats, among numerous other issues, represent examples of challenges management and boards face in navigating an organization’s risk landscape.

Key findings include:

Eliminating Language Barriers Between Information Security and the C-Suite

Whether or not security operations pose a core focus to a company or are an afterthought, the largest obstacle now affecting business and security outcomes is the language barrier that exists between security teams and the C-Suite.

In general, security groups’ budgets have increased over the years, with organizations adding more vendors to the mix, “layering” security with the latest new tool to address the latest threat. One of the newest such tools is “threat intelligence” which organizations are using to form an “intelligence-led security” program, a security operations center, or incident response capabilities. While threat intelligence and other solutions hold the answers to many of the important questions executives ask about cyberattacks, this terminology means nothing to C-level executives, nor does the output from these systems and programs. What does it mean that you have stopped one billion attacks this past month? What impact have the 30 incident responses you’ve run over that same period of time had on the business? What’s the significance to reducing response time from one month to one day?

Executives running and overseeing a company have two primary concerns: increasing revenue and shareholder value. There is a big disconnect between security and the C-suite because they speak two different languages. One is a very technical language that needs a translation layer to explain it to the executives. The other is a very strategic language that needs to be conveyed in a way that makes security part of the team and company, and ensures alignment and participation with the business units and executive suite.

What’s the fix? Communication. Each group has to understand the other at least enough to relay the core concepts as they apply to the other and in a language the other understands. As a first step, some companies are adding a technical expert—a “designated geek,” if you will—to their board of directors so they can work on improving communication and understanding. While that can help, it takes a lot more to make sure priorities, efforts and results don’t get lost in translation.

A Two-Way Street

Executives need to include the chief information security officer or chief technical officer as part of their strategic discussions and make sure that security leadership has the ability to push that communication down to their teams in a way everyone understands. To that end, CISOs and executives need to train their security operations personnel to ensure they understand the business. This starts by asking some critical questions:

  • Does every member of the security team understand what is it that you sell/produce/provide?
  • What are the things your security teams need to watch out for to protect revenue?
  • Many organizations operate large industrial control systems. If your organization has such a system, is your security team aware of this?
  • If your company is moving into the cloud or is about to launch a mobile app, does your security team know about this and have you enabled them to get the right monitoring in place to protect it?
  • Have you involved the security team as you were designing that new revenue stream, or evolving your business model in some other way, to be sure that security isn’t an afterthought?

These are just a few examples of how executives need to think about the enterprise to ensure that security is strategically aligned. It is incumbent on the business to train the security personnel on its priorities so that security teams can look for attacks that are important to the business and take action.

Likewise, security teams need to change how they communicate to the C-suite. Every security team should conduct a stakeholder analysis to identify who needs to be informed of what and when. It all comes down to content, format and frequency. Make sure you have regular communications with not only your peers in security and network operations, but with the business units, risk management, C-level executives, the board of directors, and anyone else in the company that is involved in the day-to-day objectives and operations of the company. The CISO should be the link to make this connection happen, working with executives to establish regular communication.

There is no “right way” to communicate. Some executives and boards are more technical than others. Security teams need to take the time to learn what type of communication will be most effective or forever struggle to align security with the business. Sticking with the generated metrics of number of events, alerts and incidents per month has far less impact than an update that contains the “who, what, when, where and why” of a thwarted attack. For example: “We identified and stopped one attack this month from a cyber espionage group targeting our Western European manufacturing facility, which is responsible for $20 million per year in revenue to the company.”

For those in security who feel they can’t deliver such a statement because their security infrastructure doesn’t provide that kind of information about threat actors and campaigns, there is a path forward. Look into creating a program that uses adversary-focused, contextual cyber threat intelligence and make sure you understand enough about your business to know the impact of threats against the various business units. With the communication gap closed, and security and business goals aligned, organizations can become more secure, and profitable.

Creating a Strong Defense and Offense in Your Risk Management Program

Stakeholders demand that companies grow, but at the same time, they expect growth to be managed to make sure the brand is not tarnished. That means enabling value as well as protecting value, which comes down to striking the appropriate balance between risk agility and risk resiliency.

For many years, risk management has focused on protecting the brand and keeping the company out of trouble. But if it’s done right, risk management is about playing not only defense but offense as well—it’s about value protection and value enablement.

Defensive Risk Management

Defensive risk management is mostly about risk resiliency, enabling a company to either prevent bad things from happening or recover more efficiently from disruption. Defensive tactics include setting up a risk appetite statement and framework that are approved by the board on down. Next, the risks should be aggregated across the enterprise and mapped against that appetite along with related risk tolerances and limits. Defensive risk management is also about developing a set of very specific key risk indicators (KRIs) to look for. This includes having a solid business continuity management strategy that will quickly get things back on track after a risk event. These activities keep the company out of harm’s way, and may be the easier part of risk management.

Offensive Risk Management

The more difficult part is thinking about risk management offensively—leveraging it for strategic advantage and growth. The first offensive tactic is to align your risk management process with strategic planning so you can drive those priorities forward in light of all the risks you are facing. That’s not an easy thing to do because even though companies may think they’re aligned, many of them actually run two very distinct and separate processes. Another offensive tactic involves giving some of the risk management activities back to the business units—so they can run faster and drive risk-adjusted decisions and revenue plans.

Risk agility lets a company flex and grow by making the risk management process adaptable to changes in the business model or to external changes affecting the company. It is also something that has to be thought about more formally so that it does not become counterintuitive to the growth agenda, but actually supports it and even helps drive it.

If a company is being held accountable by its stakeholders to grow—and they all are—that growth has to be pursued in a controlled manner so the brand doesn’t become tarnished. That is about striking the appropriate balance between risk agility and risk resiliency—playing offense and defense.

The simple fact is that companies that use their risk management activities to play both sides are more likely to see sustainable growth and better performance patterns because they are balanced between moving the business forward and keeping the business in check.

PwC’s study 2016 Risk in review: Going the distance highlights how companies can achieve this important balance. For example, companies that structure their risk management programs to play both offense and defense are more likely to see sustainable growth and better performance patterns. In addition, these companies are nearly as likely to report that they expect significant revenue and profit margin growth (greater than 5%) as companies that are focused only on growth—and they are better positioned for sustainable success. Such companies are balanced between having the agility to move their business forward and the resilience to prevent bad things from happening and/or recover more efficiently from disruption.
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High-risk growth

Some companies with aggressive top-line growth targets decide not to invest at the appropriate levels in their risk management programs, which can allow their growth to outpace their infrastructure. Following this course can bring more risks—vulnerability peaks and risk events become more crippling to the brand. In the end, more capital is spent on investments to take risk management activities to the next level after something bad happens to the business.

The mindset across industries is that immediate growth is great, but longer term, sustainable growth is better. Companies are building up stronger and more relevant second-line (risk and compliance) functions, and holding the first line more accountable on risk because they see that will help them achieve sustainable growth.
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Adapt or get left behind

As the business landscape continues to evolve, companies need to adapt or find themselves in deep distress. The key to creating an effective risk management program is to find the right balance that allows for growth at a comfortable pace relative to the risk appetite and risk tolerance levels set by management, and accepted by the board. When that is done, your risk management program truly becomes a strategic asset, supporting both offense and defense.

Holding Executives Accountable for Cybersecurity Failures

The average cost of a data breach for companies surveyed has grown to $4 million, a 29% increase since 2013, with the per-record costs continuing to rise, according to the 2016 Ponemon Cost of a Data Breach Study, sponsored by IBM. The average cost hit $158 per record, but they are far more costly in highly regulated industries—in healthcare, for example, businesses are looking at $355 each, a full $100 more than in 2013. These incidents have grown in both volume and sophistication, with 64% more security incidents reported in 2015 than in 2014.

Ponemon wrote:

Leveraging an incident response team was the single biggest factor associated with reducing the cost of a data breach–saving companies nearly $400,000 on average (or $16 per record). In fact, response activities like incident forensics, communications, legal expenditures and regulatory mandates account for 59 percent of the cost of a data breach. Part of these high costs may be linked to the fact that 70 percent of U.S. security executives report they don’t have incident response plans in place.

With so much on the line, more and more companies and consumers continue to search for whom to hold accountable for cybersecurity failures, and the message is becoming clearer: executives need to get serious or watch out.

In a recent report from Bay Dynamics, “How Boards of Directors Really Feel About Cyber Security Reports,” board members expressed a surprising amount of confidence in their abilities to understand and act on cyberrisk threats and indicated there are real risks on the table for IT and security executives. Almost all of those surveyed said that some form of action will be taken should these executives not provide useful and actionable information, with 59% claiming there is a good chance one or more security executives would lose their job over such reporting failures.

More board members (26%) ranked cybersecurity risk as their highest corporate priority than any other risk, including financial, legal, regulatory and competitive risks, and 89% said they are “very involved” in making cybersecurity decisions.

Following the typical presentations from IT and security executives, more than three in five board members are both significantly or very “satisfied” (64%) and “inspired” (65%), but 32% are significantly or very “worried,” and 19% are significantly or very “confused” and “angry.”

According to the report:

Of the information provided to them during these presentations, the majority of board members (97%) say they know exactly what to do or have a good idea of what to do with the information. This statistic, however, does conflict with IT and security executives’ thoughts on the information they present. Based on our December 2015 survey, only 40% of IT and security executives believe the information they provide the board is actionable. There is a clear disconnect here between what the board perceives is actionable information, and what IT and security executives define as data that can be used to make informed decisions.

“IT and security executives are focusing on what they believe are the most impactful issues: a) forward-looking information about known vulnerabilities that could potentially harm the company in the future, b) specifics about data that was lost as a result of known infiltrations and data breaches, and c) the impact of these infiltrations and breaches,” Bay reports. “Interestingly, while information about how much is spent to address cyber risk is reported by IT and security executives in less than one-half of the companies surveyed, this was the most commonly cited information that board members said they needed to make investments for cyber risk planning and expenditures.”

Bay also pointed to a critical challenge in the education gap of many board members and the reliance upon information security executives: a large portion of the education board members have on infosec is from the organization’s IT and security executives, and “when the person education you on cybersecurity is the same individual tasted with measuring and reducing cyberrisk, there’s a fundamental disconnect.” It is extremely difficult for board members to understand what they are missing without education of their own and a third-party audit in place.

As cyberrisk continues to become a top enterprise risk priority, the consequences of failure may impact more of the C-suite than just chief information security officers or top IT executives. In May, following a social engineering fraud case that resulted in a wire transfer of 50 million euros, Austrian aircraft parts manufacturer FACC fired its chief executive of 17 years. Some regulators also want to start holding chief executives accountable in a way that truly speaks to them: their paychecks. According to a report from members of parliament on the British Culture, Media and Sport Select Committee, Britain’s status as the leading internet economy in the G20 is under threat from a combination of increasing reliance on digital infrastructure, and inadequate protection of it. To address the issue, they suggest that chief executives who fail to prevent cybersecurity breaches have a portion of their pay docked.

Such was the case with Baroness Harding, the chief executive of TalkTalk, Britain’s fourth-largest broadband provider, which suffered a high-profile cyberattack recently. Her performance bonus was slashed by more than a third as a result of the company’s security failings.

“Companies must have robust strategies and processes in place, backed by adequate resources and clear lines of accountability, to stay one step ahead in a sophisticated and rapidly evolving environment,” said Jesse Norman, chairman of the committee. “Failure to prepare for or learn from cyber-attacks, and failure to inform and protect consumers, must draw sanctions serious enough to act as a real incentive and deterrent.”