I think it’s not working. I tested it on two different types of enemies, orc Young and orc Warrior. It doesn’t provide additional morale reduction (I measured the morale bar with ruler) nor enable morale reduction when enemy armor is damaged. Basically, I can’t tell what does it do.
Normally, a morale check is only performed when the individual getting hit actually loses hitpoints from the attack. However, if the attacker has the Fearsome perk, a morale check is also performed if the individual merely sustains damage to armor. This does not guarantee morale dropping, but it makes it more likely. You can experience this effect in action when fighting Fallen Heroes, because they have this perk as well. It’s working as intended.
I wonder if chance to trigger it is increased/decreased based partially on how much damage your character did or how much % of enemy armour was destroyed.
Overall it work well especially if you have many characters with it.
It always triggers a morale check for the enemy hit. Whether that morale check then results in the enemy’s morale dropping depends on their resolve – which differs between different types of enemies, naturally.