Kirk, it doesn't work because it is buggy. There are two other posts relating to the same issues recently, see "Opening Subfolders in Contact sheet problem" and "Can't open Favorites Subfolders in a contact sheet by double clicking".
The problem doesn't just relate only to Favorites Subfolders but also in Navigator panel and the problem is the contact sheet system. First it is difficult to open a new contact sheet or replace a contact sheet when you choose to include sub-folders as you get an error message. Even if you don't choose to open any contact sheet at start up you always have to close the current contact sheet first. That you can live with, but there is more.
After closing the current contact sheet you can "open folder and subfolders in a new contact sheet", however then nothing much else works within that contact sheet. The first sub-directory opens and displays its picture files, but locks everything else out. You cannot choose any other sub-directories or files within that contact sheet, you can only use the "select all" and "de-select all" options within the contact sheet, and work with other folders not included in the contact sheet.
Hope this helps you to get it sorted.
Regards Dave
