I got some time today to playtest the suggestions to better accomodate my Mutants and Death Ray Guns skirmishes in 2'x2' boards with 28mm figures, as I'd like to do for the Wasteland Wandering scenario. For these tests I used a board with only three terrain pieces and two warbands of three figures each -- not very different from the encounters I expect to have in the scenario.
Option A: Fleeing towards cover
The first option is to use the normal measurement sticks and morale rules, but to always allow figures to flee towards cover instead of board edges. A model that fails a second morale roll when in cover (say, due to cascading morale checks) must flee towards the nearest board edge.
After this game I played one more with a single piece of terrain at the center of the board. Once more the game moved really fast and in one occasion a figure that would have fled the board was allowed to move to cover instead.
Option B: Using 15mm-scale sticks
The other option is to keep all rules unchanged but to use the 15mm measurement sticks instead of the 28mm ones. This may feel wrong to some wargamers since the weapon ranges will become really short. In my opinion, shorter weapon ranges allow for more melee battles, which seems fitting for sci-fi fantasy like MDRG. In any case, I wanted to try this.
I also ran another game with the 15mm sticks, this time using lower penalties for range: 0 for base and 2x range, and -1 for 3x range. I didn't like the result: most of the time, this makes weapons with Medium and Long ranges pretty much the same.
Option A (using the 28mm scale sticks and slightly changed morale rules) makes the game really fast-paced. Failed activations become more dangerous because of the smaller board. The action starts at the very beginning of the game. It's the kind of setup I'd like to use when showing the Song of Blades engine to friends who don't know it, to get them into action right away.
On the other hand, option B (using the 15mm scale sticks with 28mm minis) keeps the game feeling more like when playing with matching scales (i.e. 2'x2' for 15mm or 3'x3' for 28mm). That is great to me, as it opens up ways for me to play with larger minis in a smaller space. It does make the ranged weapons feel a little underpowered regarding range, but for me it's acceptable.
So, regarding the question "which is the best way to prevent failed morale checks from ending the game too soon when playing MDRG with 28mm miniatures on a 2'x2' board?," both options worked well. Since in my "wasteland wandering" scenario I intend to have something like 4-6 encounters during a single game, I'll use option A to avoid making the game too long.