Chaochou, my games tend to have more GM control over setup than you describe in your original post.
After putting a pitch to which the players agree - "Samurai + the mythical world of early 90s Hong Kong martial arts movies" or "D&D based in the world set out in the 4e books, and by the way every PC should have some reason to fight goblins built in to their backstory" - the players then build PCs. As part of this, they will create backstory - families, locations, religious details etc that then become incorporated into the gameworld.
As GM, I will also work out details of the gameworld - maps, but more importantly history and NPC organisations, antagonists, gods etc - which I will link to elements in the PC backgrounds. Some of this I will tell to the relevant player, some of this I will keep to myself for subsequent big reveals. This sort of detail can run from half-a-dozen pages at the start to dozens of pages by the end of a campaign.
Play will generally begin by me, as GM, initiating a situation which relates to elements of PC backstory so as to engage the players. As those situations are resolved, new situations will be initiated by me that engage the players based on a mixture of backstory plus prior events that have unfolded in the course of play.
In your example, you were playing on very personal features of the PCs - family life, romantic attachments, reputation among fellow villagers, etc. In my games, these things can come into play from time to time, but more often the reputation and status that are in play connect to more political elements, or more fantasy/mythic elements: relationships to gods and devils, attitude towards fates/karma, the mythic history of the world etc. (And in my games politics and myth tend to be bound together - it is a fantasy game after all!)
When these are the elements of the gameworld that the PCs are connected to, and that the players are engaging with, I think it is important that the GM not enforce morality/divine law as part of play - so if, for example, one PC wants to make a deal with a devil or demon, as a GM I see it as my role to roleplay the fiend in question, but to leave it to the player in question to decide whether or not his/her PC can successfully deal with such a creature. Of coures, other players may have their PCs react to what is going on - this is part of the fun of play, like the conflict in your example between the two PCs' attitudes to Jenna - but as a GM, if I try to impose a "right moral answer" then that will tend to kill the play dead. So for someone wanting to run this sort of game, I would strongly recommend not using alignment rules which (i) impose mechanical penalties for breaking alignment, and/or (ii) encourage the GM to use alignment as a tool for beating players round the head ("if you do that, it will be an evil act!").
On the whole I think the sort of game I run is pretty traditional fantasy RPGing - combat-heavy, and rewarding of mechanically skilled tactical play and character building, and the GM having a lot of influence over the details of game elements that the PCs encounter - but the story comes out of the players' choices.