This setting allows you to control how your users can share with external people. While not letting sharing occur with people outside of your organization would be safer, it is not practical in most cases, especially not in today's work environment. Because of this, you can allow your users to share with boundaries.
Also, you may want to consider changing your Files setting (whether or not external users can view or view and edit) and your Folders setting (whether or not external users can view or view, edit, and upload).