This is the Hero Formation Editor. If you want to vary the positions where heroes stand in a battle formation, you can do it here. Then you must go to the Individual Enemy Formation Editor and choose which hero formation to use. 

Use the Up and Down arrow keys (or PgUp, PgDn, Home, and End) to navigate the menu.

<Hero Formation #>: Choose which formation you are working on. This number will be used to assign this hero formation to be used by enemy formations.

By default rectangles are used as placeholders but you can use a sprite as placeholder by selecting a slot and pressing Left/Right or typing a spriteset ID. This is just for previewing in the editor and is NOT saved. It also used in the Individual Formation Editor, though.

You can press CTRL+D to revert a hero slot to its default position.