Distributed generation (DG) systems are common within industrial plants and allow continuity of supply to critical loads. In cases when DG cannot support the entire system load, islanding detection (ID) and load shedding (LS) schemes are required. Such an automation scheme serves to monitor the connection to the grid and generation-load imbalance, and it controls the load shedding process. The design of such schemes has undergone significant revolution from electromechanical relays and PLC systems to the use of communications-enabled intelligent electronic devices. This paper discusses the design of an IEC 61850-based smart ID and LS scheme using a complete system design approach. Novel control algorithms are presented for the ID and initiation processes as well as the LS process. The study proposes an innovative system, which incorporates the generator governor gain factor in LS decisions, and assists in avoiding unnecessary amounts of LS.