An escape/retreat ability would be a great idea for a governor/general type of hero.

There needs to be a punishment for retreating. Maybe a initiative malus for some turns and/or a lost movement point. Otherwise an army could retreat endlessly. You should have to reach an escape point to leave battle too. Fleeing could also cost mana/HP(20%)/Fame or gold. It should not be for free. Also the idea from mqpiffle is fine (with some cool down).

Additionally there should be spells and items to prevent a retreat.

What a bout the AI? Fleeing for ever whit it's sov?

In EWOM there was a patch on the map that you could run your troops to and leave the battle. I forgot why they removed it in FE.

With Fame being a resource in LH, a cost in Fame has a lot of sense. In addition to that, a resource cost makes sense, because in the run the army loses part of the equipment and needs to pay again for those items.

A moral penalty would be nice, but as there is no moral in the game this could be simulated by an HP cost.

To avoid abusing the retreat feature, it would require an army reduction threshold in order to be activated. Let's say that you can't retreat until your army as a whole has 25% or less of the initial HP. The General skill could raise this percentage and also reduce the surrendering cost. The "cruel" or "ruthless" skill/trait would do the opposite, reduce the HP surrendering threshold, as a ruthless leader/champion it's more difficult to be convinced about accepting a surrender. There could even be a "pacifist" trait that raised the threshold in exchange for a creation point in your faction/sovereign.

And of course, surrendering when defending cities is forbidden.

I can understand not having a default retreat option in the current game.  If you could just retreat from a battle, warfare would become very annoying.  You go to fight something, it runs away, and now you have to fight it again, and again, and again.  At least with the Escape scroll and spell there's a cost associated with retreating that prevents warfare from becoming a series of retreats.

If a retreat option was added, the drawback would have to be significant, like losing half your troops or something.  In Heroes of Might & Magic, if you retreat from combat, you still lose your army (unless you pay your way out), and you even have to re-recruit the hero that ran away.  Losing half your army sounds pretty good compared to that.

The cruel and pacifist traits should give a benefit and a malus.

Attackers should be able to retreat at any time, at a fame cost, and retreat should never be allowed when militia is out (the city is under siege)

You'd need retreat added to quick battle, which is why I think this is unfeasible without some higher-end design decisions, maybe in the next expansion since we know we're getting it now.  (Brad blurted it out this weekend)

I like the costing Fame idea - at least in theory since we haven't tried LH and have no idea how the mechanics work.

May I remind y'all that in MoM the cost of retreat was loss of units?

And that makes perfect sense compared to fame loss or such (noone but you and the opposing army knows of your cowardice). Why? Because while you run like the chicken that you are, your units can be backstabbed, shot in the back, have spells hurled at their backs etc.

It is debatable though whether special traits like quick/fast or being a mounted unit should result in a lesser probability of losing that unit completely or it getting heavily pounded during the retreat.