Simon AshworthLondonsimon.ashworth@spglobal.com
Martin WhitworthLondonmartin.whitworth@spglobal.com
Published Oct. 17, 2023
Senior executives must understand cyber risks and act accordingly, for example by creating tangible risk mitigation strategies. Both executive and non-executive directors have to incorporate and challenge cyber risks in strategic planning processes.
The best prepared organizations are those whose board members are able to ask probing questions to uncover cyber risks within strategic plans. It is worth noting that board members do not need to be cyber experts.
We expect that governance structures will evolve to keep up with rising cyber threats and that entities will consider cyber risks in all aspects of strategic business decisions.
Cyber attacks remain a top credit risk across geographies and asset classes. Amid increasing technological dependency and global interconnectedness, cyber attacks pose a potential systemic threat and significant single-entity event risk. We view cyber threats among the most significant structural risks and expect they will increasingly impact the credit landscape in the years ahead.
S&P Global Ratings believes it is critical that issuers' C-suite executives and board members have a basic understanding of cyber risks and incorporate these risks into overall business strategies.
C-suite executives and board members do not need to be cyber specialists, but they should be able to understand and challenge Chief Information Security Officers (CISOs) on cyber security updates. Thus, they can contribute to probe cyber risks at a holistic level, detect cyber risks within strategic plans, and, if done systematically, optimize investments in cyber security. Additionally, the involvement of the C-suite can help organizations get a realistic idea of the necessary cyber security spend and may prioritize cyber security in budget allocations.
*Sample size varies by year. Source: 451 Research, Voice of the Enterprise: Information Security, Budgets & Outlook 2023.
Expectations regarding security budgets vary greatly (see chart 1) and it is important to give this matter serious and strategic attention.
A deeper understanding of cyber risks that starts at the top is vital to manage and mitigate internal and external cyber threats. CISOs should become a regular fixture at board risk committees to facilitate the information exchange with senior executives and gain a broader strategic view of the business. Attending these meetings also enables CISOs to better align security plans with strategic plans and, at the same time, helps the board understand the business impact of cyber risks. We continue to believe that the C-suite should be more supportive of simulation exercises to gauge and probe cyber resilience. The more sophisticated boards also integrate this within overall business continuity and disaster recovery planning.
The C-suite's understanding of cyber risks is evidenced by the state of its cyber risk management, including the definition of roles and responsibilities and the extent of cyber security contingency plans. Cyber risk management is improved by embedding cyber risk awareness across the entity and the constant re-evaluation of the risk-benefit of data stored within it. These elements are instrumental in avoiding attacks and minimizing costs.
We see the C-suite's reaction to cyber attacks, both from a leadership and a communications point of view, as a yardstick of its cyber security awareness. Prompt and well-considered remedial interactions with employees, customers, investors, and regulators in the wake of cyber attacks can help ensure the stability of credit ratings.
Effective communication between the C-suite and CISOs yields results. For example, many organizations find regular, clear, simple, and consistent updates on the effect of cyber risks on strategic priorities immensely useful. This communication allows timely decisions and adjustments and avoids unintended consequences, such as re-work and unbudgeted costs.
Insurance companies' board members have demonstrated their ability to comprehend complex topics, such as catastrophe risk and interest rate risk exposure, after capital calculations and modelling procedures became increasingly sophisticated over the past 10 years. Their "secret": board upskilling and training, and the increased involvement of Chief Risk Officers (CROs).
Insurance CROs gained in stature and importance by ensuring that risk considerations are embedded in strategic decision-making. Those insurance companies that are best positioned to tackle complex insurance issues enlisted the expertise of their CROs to maximize profitability and minimize risks. Based on the increasingly complex cyber landscape, we expect CISOs, just like CROs in the insurance industry, will be key to ensure the success of business models and reduce operational (cyber) risks.
We recognize that the evolution of any risk management framework is a dynamic, ongoing challenge and that different entities are at different stages of this process. Board members across industries have increasingly shown their aptitude to ask the right cyber questions. Understanding cyber risks, however, is one thing--detecting and evaluating them is another.
We expect board members will increase their collaboration with CISOs and the heads of other business units to manage cyber risks effectively. Non-executives' insights and their external perspectives are crucial to improve learnings and build links with other industries. The most developed and sophisticated boards are those that incorporate potential cyber threats in their strategic plans, actively identify shortcomings, and ensure potential remediation is appropriately resourced. A mere awareness of cyber risks is not enough.
A deeper understanding of cyber risks that starts at the top is vital to manage and mitigate internal and external cyber threats.
Editor: Kathrin Schindler.
This report does not constitute a rating action.
