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Graham is actually discussing Apple's broken iPhone app approval process, but I thought the following was so true in a general sense it was worth repeating …

An organization that wins by exercising power
starts to lose the ability to win by doing better work. And it's
not fun for a smart person to work in a place where the best ideas
aren't the ones that win.

via paulgraham.com

And as Graham points out – it's not just the smart people who are leaving that hurt an organisation, it's all the smart people that never came in the first place.