That is the agency problem and bans on insider trading do not directly address that. The agency problem is addressed through bans short-selling and put options, as long as the officers and directors have along exposure to the share price, their interests are aligned.
The ban on inside information is intended to attract capital by ensuring that stock markets are fair and transparent. If the investing public believes that the stock market is nothing more than a con to take rubes' money capital will stay away, and keep capital from flowing to productive firms.
> If the investing public believes that the stock market is nothing more than a con to take rubes' money capital will stay away
No way - now 401ks are the only retirement savings vehicle aside from striking it rich through lottery or stocks. Guess how many people translate their investment in a mutual fund to the actual stock market shenanigans?