Each creature has a base morale level that affects whether it fights or runs during a battle. The only character unaffected by morale is the one you create—other characters joining your party have morale dialogue and scripts. Every creature is scripted to react differently when morale breaks. They often break at different morale levels or choose different types of attack depending on the current morale. For example, some creatures may choose melee combat if morale is high but ranged attacks if it is low. Each creature has a recovery time dictating how long it takes for its morale to return to its base level. If characters in your party fail a morale check, their selection circle turns yellow.
Morale is positively influenced by having a leader (the topmost character in the portraits) with high Charisma, by the environment in which the character is located (for example, kobolds and drow like being underground more than outside spaces), by some spells (for example, Remove Fear), and by the type of enemies that are visible (easy enemies will raise morale).
Morale is negatively influenced by factors such as being attacked by powerful magic, seeing someone in the party killed or knocked unconscious, losing a substantial quantity of Hit Points, or spotting a difficult foe.
Source:
- Icewind Dale Enhanced Edition Manual - Part 2 - Mastering Melee & Magic