Yeah, a retreat mechanism would work great. For me, the key is to remain in control of the visible game mechanics. So from that perspective:
If an enforced auto-battle makes me lose 5% of my unit's HP, that's bad.
If an enforced auto-battle gives me the option to lose 5% of my unit's HP or allow the enemy units to retreat to their capital, that's good.
I really like the idea of having a separate honor/pragmatic/ruthless stat for the player, but even if this can't be done it would be good to change the existing method. The current solution of putting a junk unit in the last slot feels a bit hacky to me.