Short answer: you don't actually need to flare your knees out, but what you do need to do is generate torque in your hips which can be accomplished by attempting to rotate forward-facing feet outward ("screwing your feet into the ground") and thinking of this as pointing your knees out is a good physical cue.
Details: The reason you externally rotate your hips is to generate tension in your hips, butt, and lower back. This tension serves to stabilize your lower back (spine) to help you avoid spinal injury (especially when the load is heavy). In addition to the external rotation in your hips, you also want to generate torque/tension in your shoulders through rotation--you may have heard this in a form like "try to bend the bar around your shoulders/neck." The external rotation in your shoulders provides stability for the upper back/spine.
If you fail to stabilize your upper and lower back (with enough torque generated by external rotation) then you risk faults (e.g. arching your back) and consequently damaging your spine. By properly bracing/stabilizing your back you not only minimize risk of injury but you also create a more efficient transfer of power from your legs to the bar. The best way to think about rigid back being better for transfer of power is to imagine pushing a spaghetti noodle with some weight on one end. If the noodle is soft (not rigid) then when you push the noodle just bends. If it is rigid then you get a (near) perfect transfer of power from your push to the weight.
There's a really good book which covers movement like this called: "Becoming A Supple Leopard--the ultimate guide to resolving pain, preventing injury, and optimizing athletic performance" by Kelly Starrett which I highly recommend. My answer is a short summary of chapter 3 in that book.
Final note/experiment: You can do the following experiment to see the difference in how you feel. Stand tall, feet forward, shoulder width apart--hold an empty bar if you want, but don't hold any real weight. Generate some torque via external rotation by trying to twist your feet outward. You should feel your quads, glutes, and lower back tighten up (muscles activating). This position should feel strong to you. Then, instead of trying to twist your feet outward, try to twist them inward. This will feel a bit awkward and you'll feel your muscles just get loose. This is what happens when your knees collapse inward. The real danger is not so much to your knees as it is to your back which you've just left in a really compromised position--especially if you're under any load.