The chairman of ISME, Mr Peter Faulkner, has resigned his position. It follows major differences between him and the small firm lobby group's chief executive, Mr Frank Mulcahy.

Mr Faulkner tendered his resignation at a meeting of ISME's executive council yesterday afternoon and left shortly afterwards. Sources said all executive members had asked him not to resign. Mr Mulcahy was said to be absent when the issue was discussed.

Mr Faulkner said last night that he had enumerated his reasons for resigning to the council.

"I did not believe it was possible to rebuild the relationship I had with Frank [Mulcahy] in the past," he said. "A good relationship between the chairman and the chief executive of an organisation is essential if the organisation is to function properly."

In a statement the executive council thanked Mr Faulkner for his "invaluable contribution" to ISME. It said it had now decided to appoint a managing director to the organisation, "due to the continued expansion of the association and the requirement to focus resources."

It is understood that the managing director will take over all the day-to-day running of ISME and will be responsible for staffing. Mr Mulcahy will answer to the executive, according to sources.

Attempts to heal the rift between Mr Mulcahy and Mr Faulkner, which erupted earlier this summer, failed. As chief executive, Mr Mulcahy also attended part of yesterday's meeting.

The exact nature of the row between the two has not been clearly defined. It is known that Mr Faulkner had strong views about how the organisation should be developed to achieve its aim of becoming a social partner and having a tangible input into issues such as wage agreements.

Mr Faulkner felt that the organisation was seeking too much publicity too often, about too many matters. He believed ISME might be better served taking a lower-key approach in order to be taken seriously by the Government and other social partners.

Mr Faulkner said the row had entered the public domain and he felt there was a better chance of the organisation going forward "if one of the protagonists was removed". So he had decided to resign.

"Hopefully the organisation will come out stronger and some new people will come to the fore," he said.

It is understood that there have been disagreements about appointing an administrator to the organisation which has expanded significantly since its formation five years ago. Originally part of the Federation of Irish Employers (FIE) it broke from the organisation when the FIE and Confederation of Irish Industry (CII) merged to become IBEC.

The new chairman, Mr Seamus Butler, said last night that Mr Faulkner's resignation had been accepted with regret, but he had been quite firm about resigning.

Mr Mulcahy was unavailable for comment last night despite repeated attempts to contact him.

The row between Mr Mulcahy and Mr Faulkner took Irish business by surprise as both had been close friends for many years.

Mr Faulkner is popular within ISME and is well known in business circles. His candidacy for the post of chairman was wholeheartedly supported by Mr Mulcahy. He was a founding member of the organisation and a director of the board which runs its operating company and a trustee. He has resigned from these posts as well.

Mr Butler said the matters which were "resolved" at yesterday's meeting will be put before the national council at its forthcoming meeting on August 20th. This meeting has been called by Mr Mulcahy.