I'm using LW 5.3.6 on Leopard 10.5. (1) If I drag & drop the iTunes Music folder onto the Shared icon at left side of LW's window, all the files are added to the library & shared.
(2) If I drag & drop the artist folder onto the Shared icon, all those files are shared.
(3) If I drag & drop an album folder onto the Shared icon, all those files are shared.
(4) If I drag & drop selected song files from an album (selecting using the either the command or shift key), then those files are added to library & shared.

With the Mac version 5.3 you cannot add a folder to shared via the Add to Library option under file menu. This option is only for adding individual files one at a time. If using LW 5.4 you can add multiple files & folders to Library (but not shared) from the Add to Library File menu option.



As Birdy suggested, you need to first set how you wish file types to be added; 1. automatically add particular or all file types, or 2. a pop-up window asking which file types within the folder you are adding should also be included so you can customise which of audio/video/doc's, etc. types are included at the time. In the example below, option A is manually deciding which types of files each time you add a folder to LW. The pop-up window will then appear after you have dropped the folder onto the Public Shared icon on LW as in the example image above. You will not see this pop-up window if you choose option B in LW's preference settings. Make sure Audio option is checked!