Depending on if you're a cost cutting team, fixed expense team or organization, if you're a revenue driving team, or if you're a core team, or the very many other splits you can come up about the relationship between the expense/balance sheets and the team itself...there are very very different attitudes towards COEs and leadership principles.
If you find a problem like this thread’s hypothetical, the process stops being an annoyance just to line level managers, and something that directors and vice presidents need to handle by changing strategic priorities within their organizations.
That entails a real loss of face for them, and because they are the ones who actually run the show, it would will only happen if you have one that is naïve or a masochist. In either case that moves them out of management.
From the perspective of people you manage, it's a very different picture.
We (I say "we", because I was an IC) sit under you, and every year at performance review time you're effectively required to put some percentage of us in the "LE" bucket. Never mind that it's not a strict distribution, never mind that we're all HV3+ if you measure by "normal" peoples' standards; your manager isn't going to let you mark all of us as HV3 at the performance meetings. I know this, because I've been there as well at those meetings.
So what happens? When I see a peer's critical lurking bug, I have no incentive to fix it for the sake of prevention. If I fix it quietly so that it never surfaces, it looks like I haven't done any work for the week, or have done un-impactful work, and I get the stick from you.
The only "safe" way to play this system is to let that bug surface eventually, then when the SEV2 comes up, I jump in and fix it, earning your approval, skip approval, VP approval, as well as potentially the other person gets the stick from you, because you have to give the stick to someone anyway, you get a reason to stick it on them. At least it's not getting stuck on me.
I'm sorry if this comes off as shocking to you, but it really shouldn't; the incentive structure is not set up for teamwork, plain and simple.