The effect on morale and real productivity of getting rid of the toxic and worst performers is amazing.
I can't name that place without doxing myself, but it sounds like Netflix has a similar culture. Some people love it. Some people hate it. But I don't think many people would say they have an issue with employing less-than-stellar employees.
Of course this is only "solving" (it's certainly not perfect) the problem of hiring for engineers, which most of us are on HN (at least I assume, but certainly more engineers than engineering managers). It does nothing to address the issue of hiring bad managers. I have no solution for that, other than to make sure the first manager is excellent. A players hire A players because they want to do the best work they can, and will go out of their way to hire people better than themselves. B players hire C players because they just want to make themselves look good. Once you have a bad manager, the assumption is everyone beneath him will be as bad or worse (obviously there are exceptions).
Leadership, from the top down, is absolutely responsible for the mentoring, training, and environment created by the management. None of the systemic problems with & induced by management is new. It comes down to: does leadership actually care enough to do anything about it? Companies institute all sorts of formal stuff like internal surveys and NPS scoring and so forth but it always comes down to trust & communication and then follow through. And the follow through is the clearest way to create trust. All of the things that even well intentioned leaders spout, if not followed through, quickly erodes and ultimately destroys trust. So, just like with kids, don't make promises you won't keep.