It is important to control and maintain the overall system frequency to ensure satisfactory operation of the power system. System frequency relies heavily on the generation/load balance; any frequency deviation resulted from active power imbalance will initiate the response of the governor, to restore the frequency in accordance with the permanent speed droop settings of the units. A conventional approach in modelling the unit governing response is assuming the unit to be a single unit connected to a single load in an isolated system. An optimum setting for a governor will result in a desired transient response with least speed deviation and faster restoration to conventional speed when subject to a step load change. This paper discusses the stability criterion to govern an isolated hydraulic system as well as relative stability of the hydraulic system utilizing frequency response methods. Procedure to adjust system gains to improve the relative stability is presented.