The packing is used to absorb the sound energy from the engine. It is porous so the sound waves and enter it and loose their energy before they exit out the end of the pipe. You may have noticed the small holes inside the silencer. They let the sound waves pass through into the packing.
The entire exhaust system is a tuned system that includes the silencer. The length of the stinger (the narrowest part of the pipe between the cones and the end of the silencer) is important for performance. As it gets longer you will loose low end power. A newly packed silencer is not considered part of the length of the stinger but when it gets plugged it is and you will slowly loose low end as it plugs up with spooge.
On top of a performance lose it will also get louder and piss people off so keep it fresh and you will win on both fronts :)