As of 1.2, all mods need to be placed in the GC2 installation directory. By default this is C:\Program Files\StarDock\TotalGaming\GalCiv2. Put mods in the mods folder there, or wherever you installed GC2 at.
Otherwise, so long as you have the 1.2 patch, it should "just work". So long as you put KHSM in the right place, it should appear in the mods picker list (even if you ignored the rest of the readme and didn't run the included batch file properly or at all, you should get that much). It includes everything it needs for the game to at least recognize it, so long as it's been put in the right place.
Paste from a post on the official thread:
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Click the marked button on the options screen, and select KHSM from the resulting dialog box. If it is not in that list, you did not unzip it in the correct location, and if you do not have these screens/options available, you're either not running the latest version of GC2 or have somehow gotten a damaged install.
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