This paper is concerned with the stabilization or large-scale systems via an observer–controller compensator. The overall system is considered as a decentralized form containing many linear time-invariant multivariable subsystems. Using both theM-matrix property and analysis of the input-output stability, a new stability criterion for large-scale systems controlled by observer–controller compensators is derived. Finally, based on this stability criterion, a design algorithm is proposed for finding a stabilizing observer–controller compensator for large-scale systems.