The key photo appears beside an album folder to help identify the photos that are in the album. By default, the first photo in the album is the key photo. You can change the key photo to one that is representative of the photos in the album.
To change the key photo, click the arrow button on the photo you want to set as the key photo. Select Make Key Album Photo from the menu.
When viewing album folders in the album viewer, the size of the key photo depends on the photo thumbnail size you selected.