Wednesday, July 13, 2011

The NOTW Phone Hacking Scandal: Lessons for risk managers keep coming

In the context of data privacy, cyber security, and risk management I once wrote: "Failure to police your employees and sub-contractors can have serious consequences."

In the last 6 days we have seen massive proof of that as the News of the World (NOTW) phone hacking scandal has erupted onto the world stage, spewing a toxic mix of consequences, the like of which we have never seen before.

Consider anyone who owned stock in BSkB. I documented their bad news yesterday. And consider any innocent employees of the News of the World who are suddenly without a job. If those people find it hard to get new jobs because of the stigma of being ex-NOTW employees, they could argue that NOTW robbed them of their professional reputation and possibly sue NOTW and its executives on that basis.

I will admit that the possibility of getting sued for running a company in such a disreputable manner that you drag down your employees with you is not a risk that I had previously considered. But we now see that such a thing could play out as a consequence of a company hiring people to do illegal hacking, or turning a blind eye to hacking, in other words, failure to enforce ethical business practices and appropriate privacy policies. Here's what the Guardian wrote on the subject around the 1.52pm mark on their July 10 live blogging of the NOTW scandal:
Dismissed News of the World journalists who are unable to find replacement jobs and feel their professional reputations have been severely damaged could have legal grounds for suing News International, according to one employment law source. Owen Bowcott, who is the Guardian's acting legal affairs correspondent, writes about a Lords ruling that could have implications:

"There is a precedent in a 1997 House of Lords judgment that covers the predicament of two former employees of the collapsed Bank of Credit and Commerce International who claimed they suffered the "stigma" of being associated with the ex-employer that put them at a "serious disadvantage" of finding new work. "In [Malik vs BCCI] the House of Lords upheld, in principle, the right of innocent ex-employees to sue a former employer for common law damages where revelations concerning the employer's corrupt practices had damaged their prospects of future employment in the industry," one employment expert suggested. "Corruption was assumed as a hypothesis for purposes of the decision"."
Bowcott went on to say "Loss of reputation, the 1997 judgment pointed out, is "inherently difficult to prove" but it added that there is an implied mutual obligation of trust and confidence between employer and employee." The House of Lords judgment concluded. "Difficulties of proof cannot alter the legal principles which permit, in appropriate cases, such claims for financial loss caused by breach of contract being put forward for consideration."

So, there you have one more risk of bad corporate governance: Revelation of the company's corrupt practices damaging the employment prospects of your employees, leading to lawsuits. And to think it all started with a voicemail PIN number being guessed or social engineered.

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