What does Exclude Domains actually do?

Im setting up email integration in our CRM for 2 users. I want it to work so that they can see each other's correspondence to Contacts.

When I set Email Sharing to Public, a warning appears telling me to add our email domain as an excluded domain for security reasons. Ive done this, but it doesnt seem to have any affect. Both users can still see each others emails to/from a Contact. This is how I want it to work, so thats good, but I was expecting - once I excluded our domain - that they wouldnt be able to see each others emails.

Can someone explain clearly to me (Im being thick!) what the Exclude Domain feature actually does and why I should (or should not?) use it for integrating our IMAP emails?

Thanks!