Across the Pond: How U.S. Firms’ Boards of Directors Adapted to the Passage of the GDPR

Abstract

One of the prime responsibilities of the board of directors is to understand and oversee its firm’s risk profile. We exploit a recent European Union (EU) regulation, the General Data Protection Regulation (GDPR), as a quasi-exogenous shock to the cyber risk landscape to assess whether boards of U.S. firms changed their focus and governance structures to deal with this new challenge. Although an EU regulation, the GDPR applies to all American public firms with at least one EU user. Adopting a difference-in-differences methodology, we use firms previously regulated by the HIPAA as a control group, and find that boards of treated U.S. firms, on average, increase their focus on cyber risk, add more directors with cyber/IT expertise, and more frequently assign cyber risk oversight to the board or to a board committee. In cross-sectional tests, we show that these changes are positively associated with a firm’s ex ante cyber risk, but are unrelated to whether a firm had a large EU presence, suggesting a more global reaction to the GDPR. In addition, we examine some of the consequences of these board changes. We find boards that promptly responded by changing their board focus, expertise, and monitoring assignment of cyber risk around the passage of GDPR had fewer future cyber attack/data breaches and less related media attention. Our findings suggest that, on average, American corporate boards promptly responded to changes in the cyber risk environment.

Keywords: Board Resiliency, Corporate Governance, Corporations, GDPR

JEL Classification: G30