What should they do in the case that they shipped a software defect that in some circumstances leads to physical damage of a circuit board?

The "overstress condition" being detected probably indicates that the steering is drawing more than the expected amount of current due to damaged components on the circuit board.

Prior to the overseas regulator issuing a recall, it seems they were happy to not worry about it (they updated the software used in vehicles produced after the fault was identified but apparently had not issued an update to previously produced vehicles).

Yes; this is a soft recall rather than a hard recall requiring physical access to the car. Unfortunately, these qualifiers have yet to be adopted.

I'm not sure selling equipment that doesn't meet current standards should be more normalized.

The word recall seems fine. It you don't want to issue a recall then do testing.

How would an agency know if it’s soft or hard?

They know the error not the fix.

Because the agencies don’t know how the fix will be implemented.

Could be OTA, could be a visit in a garage.

One of the requirements to issue a recall notice is information about how consumers will access the fix, which is communicated to the government as part of the process.