The Global Risk Management Survey, which surveyed 2,000 public and private companies across a wide range of industries, places cybercrime/hacking/viruses/malicious codes as the fifth risk globally and the top risk in North America. The survey also projects that the risk of cybercrime will stay at these levels in 2020. Since the cyberrisk is clearly on companies’ radar screens and not going away in the near future, boards of directors need to establish an effective governance structure to oversee cybersecurity matters and monitor management’s plans and progress in this critical area. An effective oversight mechanism can also serve as a good defense of a board’s business judgement in the event of a cyberbreach and related lawsuits claiming that directors breached their fiduciary duties.
In April, the parties in The Home Depot Inc.’s shareholder derivative action reached a settlement, and as part of that settlement, Home Depot agreed to adopt a series of measures with respect to its U.S. stores, referred to in the settlement as “Corporate Governance Reforms.” This lawsuit relates to the breach of Home Depot’s payment card data systems, as a result of which hackers stole the financial data of 56 million customers between April and September 2014, by using a third-party vendor’s username and password to get into Home Depot’s system. The claims alleged against Home Depot’s directors and officers in the complaint included a breach of fiduciary duty and waste of corporate assets. The plaintiffs alleged that the defendants had “breached their duty of loyalty to Home Depot because the defendants failed to institute internal controls sufficient to oversee the risks that Home Depot faced in the event of a breach.” On Nov. 30, 2016, the U.S. District Court in the Northern District of Georgia granted the defendants’ motion to dismiss the complaint. On Dec. 28, 2016, the plaintiffs filed the notice of appeal to the U.S. Court of Appeals for the Eleventh District.
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