If there are prestigious employers who favor first class honor and the other school gives more of them, then the other school will get more students into those prestigious jobs. Meaning every school have to give them out just to compete.

Same with grades and everything. Once student having it has advantage outside, the school that is more strict will have more students loosing those advantages.

And as for quality of education and knowledge, I honestly don't have a sense that careful knowledgeable thinkers would be favored by typical management.