FRAMEWORK

WHITE PAPER 

CORPORATE GOVERNANCE 

Systemic Digital Risk: 

Understanding And Overseeing 

Complex Digital Environments 

With The DiRECTORTM And 

RISCXTM Frameworks 

Bob Zukis 

CEO, DDN 

Adjunct Professor, USC Marshall School of 

Business1 

The DiRECTORTM and RISCXTM frameworks 

support the ability of corporate directors 

to identify systemic risk issues across 

complex digital environments to identify 

threats within the overall business 

system. This paper introduces an 

integrated framework to enable a greater 

understanding of the systemic risk issues 

in digitally enabled and driven business 

systems. 

INTRODUCTION: Digital Success 

Starts At The Top 

Boardroom ability to effectively govern digital 

and cybersecurity risk is evolving slowly — digital 

disruption and cybersecurity threats are not. 

This has created an urgent need for a new 

paradigm that provides corporate directors with 

the ability to understand systemic risk and govern 

it across the complex digital systems that their 

1 Special thanks to DDN Executive Founding Members Andrew 

Chrostowski, Tom Bennett and Jerry Nowicki for their input 

and assistance with this paper. 

companies depend upon. This paper introduces 

an integrated framework based upon the critical 

domains responsible for enabling and regulating 

the functioning of a complex digital business 

system along with the elements that are causing 

systemic risk. 

Systemic risk is the threat that component failure 

in a complex system will cascade and jeopardize 

the much larger system. Systemic risk is inherent 

in almost all modern digital business 

environments and becoming more prevalent as 

digital disruption and transformation advance 

throughout business and society. 

The World Economic Forum estimates that 60% of 

global GDP will be digitized by 2022. The final 

frontier in enabling and protecting the digital 

future will be navigated by the corporate 

boardroom. 

Like the systemic financial sector contagion that 

took down Lehman Brothers and others during 

the financial market meltdowns of 2008, systemic 

risk in digital and cybersecurity risk oversight is a 

new, yet critical perspective in risk management. 

It’s an issue that requires a much greater degree 

of understanding and leadership from business 

executives to reach the promise of the digital 

future. 

Given the rapid advancements in technology and 

the far-reaching impacts of digital transformation, 

corporate director and leadership effectiveness in 

understanding and overseeing these issues has 

become much more difficult, yet significantly 

more vital. 

For many corporate boards around the world, the 

practice of digital and cybersecurity governance is 

fairly immature or even non-existent. However, 

every corporate board and its directors have a 

responsibility to understand and oversee these 

issues. 

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These issues materially impact business value in 

both the short and long-term. The ability of the 

organization to create, capture and preserve 

value in a rapidly changing digital world makes 

them priority corporate boardroom issues. 

About This Paper 

Business value, the key digital domains that drive 

it and the elements that cause systemic risk 

comprise the foundation of the overall integrated 

framework introduced in this paper. 

Business value relates to shareholder value, 

and/or stakeholder value and the many 

components that go into producing it. Value is the 

ultimate duty of the corporate board and its 

directors. Ensuring that the organization creates it 

and preserves it is the universal corporate 

director mandate as the proxy for all corporate 

stakeholders. 

The DiRECTORTM framework identifies eight digital 

domains that work together across complex 

digital systems to produce and preserve value. 

These domains individually and collectively drive 

or degrade the ability of the digital system to 

drive, produce and protect business value. 

Systemic risk in complex digital environments is 

primarily caused by five key elements that impact 

these domains. These elements are addressed 

within the RISCXTM framework introduced by this 

paper. 

The application of the overall model can reveal 

significant gaps in understanding component and 

systemic risk throughout the digital business 

system. The model is intended to be applied at 

any level within an organization including project, 

objective, functional or enterprise. 

The model is designed to be applicable to any 

organization or industry to enable a deeper 

understanding of how systemic digital risk exists 

and threatens the ability to support and deliver 

business value. 

The integrated framework is illustrated with this 

diagram: 

Figure 1 – The integration of business value, eight key 

digital domains and core systemic risk causes. 

© DDN LLC 

Frameworks are structured ways to understand a 

problem or issue. They are not prescriptive 

solutions for resolving the concerns that they may 

uncover. 

Only once risk is understood, can it then be 

managed and mitigated. These models are 

designed to offer a way to reframe how 

executives and corporate directors comprehend 

complex systemic risks in digital business 

ecosystems. They are also intended to be a 

blueprint or “Rosetta Stone” for how technology 

executives communicate the complex issues they 

manage to the boardroom in a way that 

resonates with a corporate director’s 

responsibilities and mindset. 

Our approach reflects a desire to effectively 

approach both the upside and the downside of 

digital transformation. The downside is becoming 

readily identifiable as cybersecurity risks. The 

upside is somewhat less discernible but no less 

critical to the role of the corporate director. The 

upside focuses on competitive or opportunity risk. 

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That is, how organizations use digital tools to 

create and capture value over time. Two sides of 

the same coin, the framework addresses both, as 

it must. 

Assumptions 

This paper has been written to introduce these 

concepts to business leadership and the 

corporate boardroom community. It is not an 

implementation guide. 

The paper is relevant to the corporate director or 

executive who does not have a deep 

understanding of technology issues. It is also for 

the growing group of board qualified technology 

experts (QTE’s) who are working with their boards 

or becoming corporate directors themselves. It is 

our goal to help these business leaders 

understand, communicate and mitigate systemic 

risk in the complex environments that they 

govern and manage. 

We wanted these concepts and models to be 

quickly consumable. So, this text is as brief as it 

needs to be. Good frameworks are simple, but 

not simplistic. 

By reframing the risk management approach 

surrounding digital disruption through a systemic 

risk approach we can take a large step forward in 

addressing the digital leadership crisis facing 

companies around the world. Enabling corporate 

directors and their organizations to fulfill the 

promise of the digital future is our key learning 

objective with this work. 

What The Models Look Like And How They 

Work 

Corporate governance is an evolving practice 

globally. Its origins go back hundreds of years as 

the corporate form evolved as a means to pool 

and deploy capital around the world. 

The role of the corporate board and its directors 

has been shaped over time by the laws, 

economics, politics, social practices, technologies 

and the history of the realms that have given rise 

to the corporate form. This makes every 

corporation and every corporate board a product 

of its unique circumstances. 

Boards need to be comprised of corporate 

directors who have the skills and capabilities to 

effectively oversee the companies and the 

environments that they operate within today and 

in the future. Corporate directors must exercise 

insight and judgment that influences business 

outcomes in both the short and long-term. 

Many forces are converging anew that are 

disrupting the corporation, the corporate board, 

and its directors. Local and global instability in the 

political, economic, social, technological, 

environmental, and legal environments are 

remaking corporations and challenging corporate 

leadership in new ways. 

The common denominator across all of these 

challenges is the influence of digital disruption. 

For corporate governance and boardroom 

directors this presents an unprecedented 

challenge, and an extraordinary opportunity. 

Navigating this future starts with understanding 

value, how it is changing, created, captured and 

preserved and how the digital system serves that 

purpose. This is the starting point of the 

integrated framework. 

Value 

Value encompasses all the component aspects of 

how companies create, capture and protect value. 

It includes the common corporate objectives of 

producing and growing revenue, profitability, and 

competing in competitive markets. Risk 

management and corporate governance serve 

these core purposes. 

Different countries, legal jurisdictions and 

regulatory bodies impose different rules and 

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requirements that drive a range of corporate 

governance practices and approaches globally. 

These differences and subtleties are not our 

focus. Our focus is on the universal need for all 

corporate boards to improve digital and 

cybersecurity risk oversight to drive and preserve 

business value. 

As such, the model serves the fundamental 

corporate director responsibility as steward of the 

long-term health and well-being of the firm. 

Many factors contribute to the concept of 

business value, some tangible and measurable, 

some not. What’s valued, and what creates value 

is also dynamic. A company’s unique value 

proposition is its own and delivering on it is the 

unique challenge that all business leaders face. 

While shareholders are principally concerned with 

stock price, revenue growth and profitability, 

other corporate stakeholders can define value 

differently. While corporate directors will usually 

see their responsibilities through the lens of 

shareholder value, that’s not always their singular 

mandate. In the United States, Delaware law 

emphasizes shareholder primacy as the key 

responsibility of the corporate director. But in 

Europe, a broader stakeholder view is more 

common. This view is also beginning to emerge in 

the U.S. 

A corporation has many stakeholders from 

shareholders, employees, customers, suppliers to 

the communities that they operate within. Price 

and convenience may define value for customers 

while wages, working conditions, and job security 

may be the primary value drivers for employees. 

Every company is a collection of value 

components that collectively drive an overall 

value proposition. That value proposition is a 

unique system in its own right; one that is directly 

enabled and/or created by the digital system. 

Each of these individual value drivers can be 

dependent upon the complex digital system in 

addition to contributing to the greater whole. 

Digital systems are not only core value enablers 

but are increasingly becoming a core producer of 

the value proposition. 

This hasn’t always been the case. 

Figure 2 – Digital’s role in business value creation. 

© DDN LLC 

While there is a renewed debate about the 

purpose of the corporation and who it serves in 

the U.S., most of America’s boardrooms remain 

legally bound to the purpose of shareholder 

primacy. Whether that objective gets achieved 

with a different approach encompassing all 

corporate stakeholders remains a work in 

progress. 

Regardless of who the corporation serves, the 

result of an organization’s effort to create value 

manifests itself most commonly in the value 

created for its shareholders. Measured by share 

price, revenue and profitability these are the most 

commonly recognized value measures that digital 

systems serve. Most corporate directors will 

relate to issues in this context whether legally 

required to do so, or intuitively 

To serve all stakeholder interests, the core 

economic motivations of free-market businesses 

must first fulfill the ambitions of the company’s 

owners. Expanding the economic pie to enable 

larger slices for all and equitably distributing 

those pieces is also a boardroom issue. While 

America’s boardrooms remain tethered to first 

creating shareholder value, the models in this 

paper also embrace all stakeholders. 

Business value is the measure of total value 

output that the digital system both serves and 

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creates for all of its stakeholders. Our model 

begins with the core language of business value 

as the reference and anchor points for this 

primary service obligation of the complex digital 

system. 

This approach makes the model universally 

relevant to all for-profit enterprises. It also 

focuses directors to help them understand how 

the complex digital system serves the ability of 

the organization to create, capture and preserve 

value over time across its entire ecosystem. 

KEY POINTS: 

• A director’s role serves shareholder and 

stakeholder value and understanding how 

the digital system supports and drives it. 

• Value can come from many different 

component elements that make up a 

business system. Value can change and it 

is increasingly enabled and delivered 

through the digital system. 

• The common language of the boardroom 

is built upon value creation and 

preservation. 

The DiRECTORTM Framework And It’s Eight 

Domains 

The DiRECTORTM framework covers eight key 

domains that enable complex digital systems. 

From a corporate director’s vantage point these 

domains represent the key risk areas within the 

digital system. These domains are co-dependent 

and regulate the functioning and health of the 

digital system and how it supports business value. 

Many digital issues and initiatives span several, if 

not most of these eight core domains. Corporate 

oversight needs to view and comprehend risk 

within each domain, while simultaneously 

understanding the systemic dependencies and 

contagion risks throughout the entire system. 

The eight-core domains that comprise complex 

digital systems include: 

Data — Digital oversight starts with data and how 

digital systems and business environments 

convert data into knowledge, insight, and action. 

Data can directly drive a value proposition, is vital 

to operating a business and is actively targeted by 

hackers for its intrinsic value. 

iArchitecture — Information architecture is the 

technology design and backbone of the digital 

system and how it interacts with the business 

system. Digital systems embody the software, 

network, people, business processes and 

hardware components that enable any business 

system. 

The DiRECTORTM ontology and it’s eight domains 

can be illustrated with this diagram. 

Figure 3 – The eight domains in the DiRECTORTM ontology. 

© DDN LLC 

Risk Communications — Crisis communication 

gets the headlines. But leadership communication 

around the digital and business systems spans 

strategic and tactical communications that need 

to reach every stakeholder internally and 

externally. These communications play a key 

inter-dependent role with all of the DiRECTORTM 

domains. 

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Emerging Technology — New digital tools are 

constantly emerging that can enable, threaten or 

redefine existing value drivers. These tools also 

layer on new complexities across the existing 

system. They can also exploit or alter 

fundamental economic concepts and principles in 

new ways making them an essential concern in 

digital risk oversight. 

Cybersecurity — Where there’s business value, 

there’s risk. Hackers find and hack the weakest 

digital link. The non-stop threat to every digital 

system and the business supported by it, creates 

significant value protection and preservation 

challenges from people to technology; both from 

internal threats and external. Cybersecurity is not 

an afterthought. It’s an integrated component of 

every digital environment from start to finish. 

Third-Party — Business ecosystems have never 

been more connected. Systemic risk compounds 

across an extended business network that is 

constantly connected and in motion. Every thirdparty interacting with a digital system creates 

inter-dependencies and compound contagion 

risks across all systems. 

Operation of IT — The pace of change in digital 

and IT is constant. The ability of an organization 

and its digital operations to effectively adapt to 

this type of dynamic environment plays a critical 

role in the sustainability and resiliency of the 

entire system. 

Regulation — Digital regulation is accelerating 

and expanding. Fines, penalties and rules 

imposed by regulators directly influence business 

and shape corporate governance practice and 

policy. Every organization also has the 

opportunity to engage in public-private dialog on 

digital legislation. Compliance is a boardroom 

staple and understanding how this emerging 

regulatory world impacts digital risk and engaging 

in shaping responsible digital policy requires 

boardroom involvement. 

Issues, risk or failure in any one of these domains 

can destabilize and put the entire digital system at 

risk. Complex systems science is focused on 

understanding the relationships and interactions 

between elements. 

For example, new digital technologies, e.g., IoT, 

that support revenue growth or a profitability 

objective can introduce a new cybersecurity risk 

profile into a company. Those risks can jeopardize 

that specific business objective and others across 

a business system. 

Those new technologies may also create new data 

types and sources that fall under a specific 

regulatory or policy directive such as supporting a 

service level agreement (SLA). The new digital 

technology may also be provided and supported 

by a third-party service provider which introduces 

a new information architecture element that 

creates a critical third-party risk. 

That new technology may also require interfaces 

into other systems creating vulnerabilities and 

compounding complexity and risk across the 

entire digital environment. 

The implementation and operation of this new 

technology may also impact a large number of 

users or customers across the enterprise and 

require a long and complicated design, build and 

launch process. 

All of these component considerations have 

dependencies that contribute to creating another 

layer of complexity across a digital system already 

embedded with systemic risk. 

Component risk and failure of any one element of 

this complex system could endanger the entire 

system. Introducing a systemic risk model is 

imperative to understanding how, and why, and 

to managing these risks to business value. 

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KEY POINTS: 

• Systemic digital risk is the threat that a 

component failure or weakness will 

jeopardize the larger digital and business 

system through contagion effects. 

• Digital risk oversight spans eight complex 

domains that are individually material and 

inextricably linked. 

• Every company has a digital footprint 

specific to its organization and the value 

proposition that it is delivering. 

RISCXTM And The Causes Of Systemic Risk 

Existing risk management approaches fall short in 

their ability to accommodate complex systems 

and the inherent levels of systemic risk in today’s 

digital systems. This requires a new paradigm in 

how to design, manage and control these new 

frontiers of digital complexity in business. 

Systemic risk models are emerging in other 

domains globally to comprehend our complex 

world, e.g., planetary health, financial services, 

healthcare, etc. 

“The whole is greater than the sum of 

its parts.” -Aristotle 

Adapting and applying these emerging bodies of 

work from these other fields to the practice of 

complex digital systems oversight gives us a 

leveraged starting point. 

Scientists have identified nine core elements that 

work together to contribute to the health of the 

earth system that enables a stable planetary 

environment ideal for human life. Climate change, 

ozone depletion, ocean acidification, and 

freshwater use are five of the nine critical 

processes that combine to effectively regulate the 

entire earth system. 

Scientists created this systemic model to identify 

the critical causes or processes critical to 

planetary health. From here, they can understand 

where the risk lies within each element to 

comprehend the threats to the complex system 

critical to supporting life on this planet. Having 

this model and perspective can then lead to more 

targeted steps to begin to relieve the issues 

contributing to risk within and across the entire 

system. 

Systemic risk and its contagion effects were also 

exposed during the financial crisis of 2007-2008 

across the financial services sector. BASEL III is the 

third part of the BASEL international regulatory 

accords focused on banking sector risk, 

transparency, and resiliency. BASEL III has started 

to identify the contagion risks and their causes 

that were experienced during the financial crisis 

to understand what happened and to prevent 

them from happening again. 

This body of work has provided insight into our 

approach to understanding systemic digital risk. 

Several concepts have been adapted into the 

DiRECTORTM and RISCXTM frameworks. 

Systemic risk can create a domino effect where 

one component failure cascades across a much 

larger system, putting the entire system at risk. 

Automobiles are complex systems comprised of 

multiple intricate and inter-dependent domains. A 

combustion automobile is comprised of fuel 

systems, electrical systems, suspension, air 

conditioning, lubrication and exhaust systems 

that all work together to move a 4,000-pound 

mass of plastic and steel; while safely protecting 

the passengers inside. A flat tire on a car 

jeopardizes the entire system of the automobile 

that can render the larger system useless. 

A simple fix to this catastrophic systemic risk is a 

spare tire. An innovation such as run-flat tires 

enables the system to continue to operate at a 

reduced functional level despite a component 

failure. Both are risk management tactics but very 

different approaches to the issue, with different 

results. 

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Replaceability of a key component in a systemic 

risk environment is one critical cause of systemic 

risk failure in complex systems. The RISCXTM 

framework starts here. 

While the DiRECTORTM model identifies the eightcore domains from a corporate director’s 

perspective that regulate the health and vitality of 

a digital system, the RISCXTM model identifies the 

five key causes of systemic risk within and across 

these domains. 

Together they form an integrated framework for 

understanding systemic risk issues and levels in 

complex digital systems. 

Figure 4 – RISCXTM and the key causes of digital systemic 

risk. © DDN LLC 

Replaceability — How rare, irreplaceable and 

important is a component within the system? 

Critical, hard to replace components create 

significant risk and brittleness in a complex 

system. The more dependent the system is on the 

component and the harder it is to replace, the 

greater the level of risk to the larger system. 

Interconnectedness — Businesses and the world 

have never been more interconnected. Digital 

environments can be highly connected both 

internally and externally. The more connection 

points across the system, the greater the risk of 

contagion, both inbound and outbound and the 

greater the risk that the failure can spread and 

cascade. 

Size — Size impacts total exposure across the 

system. The larger the data universe that is being 

enabled, the more risk there can be within that 

data and across the system. Size factors from 

multiple perspectives including end-users, thirdparties, software systems, etc. Scale creates more 

points of vulnerability, adds to digital complexity 

and contributes to systemic risk. 

Complexity — Complexity in any environment 

makes it more difficult to understand how the 

environment functions and how it can be 

controlled. Digital complexity develops from 

multiple areas including the number of 

component elements and heterogeneity within 

the system and operation. Complex digital 

environments and operations cause systemic risk 

to increase. 

X-jurisdictional — Companies and networks that 

span the globe create vulnerabilities from 

anywhere that can travel rapidly to everywhere. 

The more regulatory environments a digital 

system is exposed to the more difficult it is to 

oversee and manage regulatory risk. Jurisdictions 

include regulatory bodies and other policy 

jurisdictions such as rules imposed by third 

parties. 

KEY POINTS: 

• Systemic risk in digital environments 

creates contagion effects that jeopardize 

the larger business system. 

• Systemic risk is inherent in complex digital 

systems and is caused by five core 

elements inherent to the system. 

• Once risk is understood it can be 

managed. 

Applying The DIRECTORTM And RISCXTM Models 

Digital transformation and cybersecurity risk are 

transforming the world around us and will 

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continue to do so. Cybersecurity has been 

declared an “existential risk” by the World 

Economic Forum and Warren Buffett. Digital 

disruption and transformation and their impact 

on business and society put these issues at the 

top of the global boardroom agenda. 

The lag in boardroom capability development 

around digital and cybersecurity risk 

understanding and oversight has created a 

leadership crisis for many companies around the 

world. Business leaders are struggling to evolve 

their company’s ability to adapt to the business 

benefits of digital transformation while 

simultaneously mitigating the cybersecurity risks 

that come along with these very same 

opportunities. The rapid pace of development 

and adoption of new digital approaches and 

technologies will only continue to exacerbate this 

problem. 

This challenge puts corporate directors in the 

middle of these issues. Directors around the 

world have a duty to oversee how the companies 

they govern use all of the tools at their disposal to 

drive and preserve value for their organization’s 

stakeholders. 

While there are different jurisdictions and laws 

that govern the purpose of the corporation and 

who it serves, there is a universal objective for 

every corporation to create and preserve value 

and to survive into perpetuity. Corporate 

directors are the stewards of these goals which 

makes them the guardians of our digital present 

and future. 

New perspectives can often yield new insights. 

The integrated framework we’ve introduced in 

this paper creates a starting point for analyzing, 

understanding and communicating systemic 

digital risk. 

Our objective is to develop the ability of business 

leaders to have a deeper understanding of the 

systemic digital risks underpinning their business. 

The framework is also intended for technology 

executives to convey the complexities of their 

management efforts in a way that corporate 

directors can relate to, bridging the 

communications gap on these issues. 

Once risk is understood, steps can be taken to 

manage it. This increases the value of business 

outcomes. That’s the fundamental role of the 

corporate director. 

These models can be applied at a detail level to 

understand the specific issues underlying 

systemic digital risk. They can also be applied 

through a high-level walkthrough to yield value as 

it will force a corporate board or leadership team 

to think through their digital environment and 

business differently. 

Figure 5 – The integrated DIRECTORTM AND RISCXTM 

frameworks. © DDN LLC 

Directors and leaders who view their oversight 

responsibilities through this framework will shine 

a light on the inherent complexity of their digital 

system and the dependency their business value 

proposition has on it. 

Our work is expanding to develop a reference 

guide across many different digital scenarios that 

will help apply the model. We will also be creating 

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reporting templates to help summarize the 

information and insights that can be gathered 

during the implementation of the models. 

Managing and overseeing complex digital systems 

is a multidimensional process and practice. Doing 

it effectively is critical to realizing the digital 

future. 

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