Technology: Are there clouds on your board’s radar?

A look at directors’ fiduciary duties in the cloud

Directors are responsible for ensuring the long-term viability and health of companies they serve and have an important role in overseeing enterprise risk management. Directors have a duty to exercise care and to make reasonable inquiry about important matters that impact the business-such as the outsourcing of business processes to the cloud.

Although the use of cloud services continues to grow, with Gartner reporting that 38 percent of organizations surveyed are using cloud services today and 80 percent of organizations indicating that they intend to use some form of cloud services in the next 12 months, many boards are not sufficiently engaged in understanding and supervising the company’s strategy for cloud technologies.

According a recent report, businesses lack the information to understand and mitigate a broader set of risks posed by the use of cloud services. “What we are seeing from this report is that there are no consistent policies in place to manage the security, compliance, governance, and legal risks of cloud services,” said Rajiv Gupta, founder and CEO at Skyhigh Networks. “Our cloud usage analytics suggest that enterprises are taking action on the popular cloud services they know of and not on the cloud services that pose the greatest risk to their organization. Lack of visibility into the use and risk seem to be crux of the problem.”

Boards need to make certain that management implements systems and controls necessary to identify and manage risks in a reasonable manner. At a minimum, directors need to be aware of any business critical services that have been outsourced to a cloud services provider (CSP). Ideally, the level of board attention to overseeing cloud services is commensurate with the relative importance of the business operations deployed in the cloud. Both management and the board need to ensure that adequate controls are in place to avoid significant risk to the business.

Evaluate and plan: Board considerations

Evaluation and planning are essential to effectively deploying cloud services. It is essential for directors to understand the significance of cloud services to the company’s success and operations in order for the board to develop an appropriate strategy and plan for oversight. Boards need to ensure that there is a cloud plan and strategy that supports the company’s mission and considers value and opportunity costs. A company’s board and management are responsible for considering a number of important strategic issues in determining whether to use a cloud service:

  • Ask about extent of the company’s use of cloud services and cloud strategy.
  • Ask whether management has sufficient expertise to manage a cloud provider.
  • Discuss security, privacy and compliance risks associated with the cloud.
  • Ask how use of the cloud impacts compliance obligations.
  • Discuss the costs and potential volatility of adopting a cloud service.
  • Determine who from the board is responsible for monitoring ongoing risks to company from use of cloud services.
  • How will risk/return from cloud services be measured and tracked?

The board and senior management should also establish and approve enterprise-wide risk-based policies to govern use of cloud services. Cloud service policies should address the risk to the business from use of cloud services and be appropriate to the size and complexity of the business and provide the framework for management to identify, measure, monitor, and control the risks associated with the use of the CSP from an end-to-end perspective, including establishing servicing requirements and strategies; selecting a provider; negotiating the contract; and monitoring, changing, and discontinuing the relationship with the CSP. Cloud service policies should establish expectations for employees when using cloud services in connection with institutional data and systems. Cloud service policies provide a framework for required behaviors, rules and responsibilities, and information classification and handling.

Risk-based supervision

Boards need to ensure that management has an appropriate risk-based supervision plan which identifies existing or potential risks that could adversely affect the business, assigns appropriate risk ranking and evaluates the overall integrity and effectiveness of risk management practices. The plan should include policies and practices to ensure that the CSP complies with applicable laws, rules, regulations and guidance in providing the cloud services, and monitor significant changes in CSP products, services or risk management practices that could adversely affect risk profiles of CSPs or those of the business. It is essential for the plan to include ongoing communication to the board about any significant findings, recommendations, or corrective actions concerning CSPs or cloud services.

Protecting the board and management from unwanted liability

As part of a board’s risk management oversight function, directors should carefully assess how cloud services are used and whether cloud services are used in business critical functions in the companies they serve. There are increased fiduciary risks to boards of directors that are unaware or ignore their responsibility to oversee business critical operations, such as those outsourced to the cloud. Company counsel should consider these fiduciary risks and potential and work with management to provide appropriate education and information to the board about the use of cloud services in business operations to ensure that board members meet their duties of care.

Contributing Author

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Janet A. Stiven

Janet A. Stiven, a Dykema Gossett PLLC Member, practices in Dykema’s Business Services Group where she advises clients concerning the legal implications related to technology...

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