The strategy is certainly workable. This is a game of balance, and by focusing so intensely on loyalty you may be depriving your empire of other benefits.

I only make governors out of units with 4 or more acumen. Less acumen can really impact your cash flow. I make guvs out of the highest loyalty 4-acumen guys. Dread and V&Vs also play a role.

I like to fight with my heirs, it improves their command ranking and gives them good virtues. Generals must be a minimum of 4 loyalty, or it's back to the capitol to join the King's bodyguard, as you do.

Keeping a bunch of expensive Royal Knights back in Capitol City seems a little inefficient, especially with a large empire.

Palaces are necessary to train certain high quality units (like VG for the Byz) and as prerequisites for other important buildings. Restricting the construction of palaces may reduce your ability to produce good units in a pinch.

I used to think that it was important to keep Guvs in their provinces in order to avoid morale penalties or other vices, but the programmers corrected me in another thread. They removed the absentee penalty in order to simplify gameplay, so its not necessary to keep your Guvs at home.

I posted a list of ways to deal with happiness and reduce rebellions a short while back, in this thread:

ichi's bright ideas

ichi