Errm...? Well if it did work like that, it certainly wasn't by design (). In fact some time ago I was interested in finding out what controlled the default skirmish/hold formation/engage at will behaviour of units. Basically I wanted to remove spears from the game altogether and have them behave like swords (or to be more specific, like more defensively oriented versions of halbs/bills/jhi), in 60/120 units as well, defaulting to engage at will as swords do (making them more like YS/YA in STW). I have never worked out how to do it. Just changing "spear" to "sword" in the unit prod file doesn't work.
You need to make changes (build/train/move/agent missions) then end the turn for only one faction. If you make changes for more than one and end the turn, only the last faction's changes will take effect. The AI will undo all of the others and do it's own thing.
A very interesting mode of play.
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