The passive nature of the campaign AI has been fixed and I owe a massive apology to Grandviz, the problem was never in his code, it was in mine.
The fix turns a core system (Dummy AI governors) upon it's head and before I release a patch I will need to make many adjustments to the AI scripting to achieve a readjusted balance. I am going to wait before releasing patch 1.2.
However, if you want to test the campaign WITHOUT passive AI and help me to find that balance, you will need to save the file from this post into your for_king_or_country\data directory. It will over-write the old file.
Install instructions:
RIGHT CLICK export_descr_character_traits.txt
LEFT CLICK "Save as"
Browse to C:\Program Files\SEGA\Medieval II Total War\for_king_or_country\data
When asked whether you want to overwrite the old file, click YES.
Cheers