You've Been Hacked: Board Cybersecurity Liability and Risk Management

August 9, 2019

When it comes to cyberattacks, even the mighty fall. From rogue employees to inadvertent leaks, the number of breaches in Canada continues to climb. Cyber-risk management has become omnipresent for boards of directors (boards) across Canada. John MacKay, Chair of the Public Safety and National Security Committee, warned that "from a security standpoint, this is the new terrorism". According to Statistics Canada, over one-fifth of Canadian businesses reported a cybersecurity incident that impacted their operations in 2017. Research found that the average cybercrime cost to Canadian companies was US$9.25 million in 2018. Cyber breaches can cause large financial and reputational losses. Directors must contemplate how to prevent their companies from becoming a victim.

What is a Cyber Breach?

Cyber breaches typically involve the unauthorized access of data and occur through the exploitation of system vulnerabilities, weak passwords, and targeted malware attacks. People-based attacks are increasing, with phishing and social engineering attacks now experienced by 85% of organizations globally. Social engineering involves the use of deceptive practices to manipulate individuals into taking actions or exposing confidential information. A common thread amongst cyber breaches is the release of personal data. Companies should be aware that these breaches may invoke statutes related to data protection including Canada’s Personal Information Protection and Electronic Documents Act. If an issue does occur, the company should be aware of, and act on, required disclosures, particularly if the company is public. 

What is Required of Directors?

Directors can be liable for data and cyber breaches if found in breach of their corporate duties. Canadian law imposes two main duties on directors:

  • to act honestly and in good faith with a view to the best interests of the company (the fiduciary duty of loyalty); and
  • to exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances (the duty of care).

The fiduciary duty of loyalty requires that directors act honestly and in good faith vis-a-vis the company, avoid conflicts of interest with the company, and not abuse their position for personal benefit. The duty of care requires that directors make decisions on an informed and rational basis, with diligence, and after appropriate deliberation. Directors’ decisions are held to the objective standard of a reasonably prudent person in comparable circumstances.

How Can Directors Defend Themselves?

In considering whether a director has complied with his or her duties, courts apply the “business judgement rule” by deferring to directors’ decisions if they lie within a range of reasonable alternatives. To invoke the business judgement rule, the director must be able to demonstrate that he or she exercised judgment on a proper factual foundation and acted in the best interests of the company. The due diligence defence allows directors to avoid liability if it can be demonstrated that processes were established to prevent the event that gives rise to a potential claim. A director may rely in good faith on statements, documents, and reports created by professionals. To raise a due diligence defence, directors should be aware of cybersecurity policies and protocols, and they should be appropriate given the context of that particular business and industry.

Legal Developments that Could Influence Your Liability

Canadian caselaw has yet to be built out regarding the subject of director liability for cyber breaches. American caselaw provides a window into potential Canadian legal developments. Many attempts in the U.S. to hold directors liable for data breaches and cyber-losses have been unsuccessful. However, in recent cases involving Yahoo! Inc. and Equifax, the court found otherwise. See Five Topics to Follow in 2019: Cybersecurity for more details.

These recent cases from the U.S. show that officers and directors have the potential to be held liable for cyber breaches. In considering the findings from these U.S. cases from a Canadian perspective, there is a risk that a court could find an executive fails to meet his or her duty of care where a reasonable person, aware of security vulnerabilities, would have taken steps to remedy such vulnerabilities. Further, these court rulings also suggest the risk that an executive could be precluded from relying on the business judgement rule or due diligence defence where it can be proven that proper and appropriate processes were not followed.

Managing Your Company’s Risks

With cyber breaches gaining exposure, boards are coming under intense scrutiny to ramp up company cybersecurity measures. Although directors need not be involved in every technical detail related to cybersecurity, the board should ensure proper oversight.

The following are some elements that companies, both large and small, should consider:

  • The board should understand cybersecurity risk management strategies and support this from a leadership perspective.
  • Appropriate internal policies and procedures around privacy management, cybersecurity, and data protection should be set. The company should enforce these policies and consider discipline in the event of an employee policy breach.
  • Regular training and education of staff to support proper levels of working knowledge and enforce best practices.
  • Rogue employee strategies should be contemplated. This includes having, where practical, detailed and clear contractual relationships with employees including carefully drafted confidentiality and/or non-disclosure agreements. Other strategies include having the company’s policies and procedures referenced in all employment contracts and easily accessible to employees, and ensuring that managers are alive to resistance or resentment from employees.
  • Evaluation of the type of data that the company regularly collects and limiting the access of personal data only to required personnel.
  • Documentation of directors’ decision-making processes to be able to demonstrate the exercise of care, diligence, and skill.
  • Employment of qualified cybersecurity personnel and assigning an officer with specified privacy roles and duties, where appropriate.
  • Regular assessments of information systems, networks, and applications, including multi-factor authentication.
  • Conducting ongoing third-party vulnerability and security tests. If using cloud service providers, the company should evaluate the vendor’s security.
  • Obtaining of expert external advice.
  • Insurance related to cybersecurity and Canada's anti-spam legislation to cover incident responses and recovery measures.
  • The Canadian Centre for Cyber Security recently issued the Baseline Cyber Security Controls for Small and Medium Organization to help businesses with their security controls, and it may be a useful reference.

Please do not hesitate to be in touch if Stikeman Elliott can be of further assistance with respect to the foregoing or general questions related to director liability.

Co-authored by Prateek Gupta and Melissa Craig, Legal Summer Student.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice.

Stay in Touch with Knowledge Hub