This short article shows you one of the possibilities why you cannot update your Local Security Policy settings and how can you update that.
You can see from right side of the screen below the Keep password history for is grey out.
This could be because your server is in a Domain than Workgroup.
Start Group Policy Management go to the Domain. Look for your server name. Finally get down Default Domain Policy, right click and choose Edit.
This is where you can set your Local Security Policy in a Domain Server.