More than $14 billion of shareholders’ money, nearly $11 billion in venture capital, and a sizable percentage of Harvard’s newest MBAs headed for Silicon Valley and its counterparts elsewhere in the first three quarters of 1999. Record numbers of people and amounts of money are flocking to the new economy’s Pied Piper: the Internet start-up, with its promise of innovation and wealth. But crackling behind the song, you can hear the distortions of a market that has primarily rewarded insiders and short-term investors instead of aligning the interests of executives, employees, and shareholders around the long-term performance of these companies. And when the time comes for the piper to be paid, as it inevitably must, the least informed and most starry-eyed of the participants—retail investors—will probably pay the highest price.

The story of this misalignment begins with the first-day IPO "pop," for which Internet companies are now famous. On average, the share prices of the 175 such companies that went public in the first nine months of 1999 closed on their first trading days at levels 77 percent higher than their IPO prices. Events of this sort are immediately and massively celebrated in the communications media as evidence of...