Yes, units are aware of nearby other units, both enemy and allied, and suffer a morale penalty if they are outnumbered or their flanks are threathened. Similarly, they gain a morale bonus when they outnumber the enemy or their flanks are covered. Routing units also affect the morale of nearby allied and enemy units, but not far-off ones. However, there is a penalty for "loss of battle" which kicks in on all units when one side is losing badly.