With the current model, enabling dread on the battlefield would be unwise, as generals are too strong in MTW anyway. Armies are held together by a good general, having no real valour in their own right and when the general dies the army withers away. This is highly unrealistic as it is. Adding dread would have overbalanced this further, lowering the AI enemy's morale to an unacceptable level. As ever the player could exploit this by training up good high dread generals, whereas for the AI, obtaining a high dread general would be a matter of luck.
I also don't think that in real terms, coming up against a high dread "Martok the Butcher" would have frightened the enemy in this way. They would be less likely to want to be captured by said general knowing that a lifetime of toil and hardship in the camel stables awaited them... I'm sure they'd fight to the death to avoid such a fate.
Perhaps a general's dread could have been used as a morale modifier for
his own troops? As it is, the general's command stars give valour but the morale bonus is separate and only comes into effect on the battlefield in proximity to the general. The dread stat could have been used as a modifier for this. The amount of dread being relative to the amount of the bonus? Martok the Butcher's own men would be sure not to rout while under his command. Dread could also have a "see-saw" effect with 0 giving no bonus, 1 to 5 giving some, but 6+ starting to take it off again, i.e. the men not wanting to fight for such a murderous fiend.

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