Given Cadorna's reputation with the troops (or what we can infer of it), his replacement with Armando Diaz after the military disaster of Caporetto could only be seen as an improvement.

Cadorna's disciplinarian attitude, his obstinate recourse to afflictive measures in order to shape the soldiers into a military mindset, his disregard for what his colleague E. Caviglia euphemistically described as "the principle of economy of forces"; all of Cadorna's flaws have been thoroughly examined and, not unfrequently, exaggerated to the point of parody (in good measure due to the extremely divisive character of the figure of the old Generalissimo in the first attempt at a post-war elaboration of the experience of the Great War). Broadly speaking I tend to concur with historians like G. Rochat (L'esercito Italiano da Vittorio Veneto a Mussolini - and - L'Italia nella prima guerra mondiale) who pointed out that the many flaws manifest in the Italian High Command during the Great War were an expression of a more fundamental kind of "backwardness" in the Italian Military, than merely of Cadorna's maligned brutality and incompetence, as well as of a deep and persistent disconnect between the Italian masses and the institutions of the State, and especially of the structurally repressive ones (see for instance Melograni, P. - Storia politica della Grande Guerra - and - Forcella, E. ; Monticone, A. - Plotone di esecuzione; I processi della Prima Guerra Mondiale - as well as - Procacci, G. – L'internamento di civili in Italia durante la prima guerra mondiale - and - Repressione e dissenso nella prima guerra mondiale - and - Soldati e prigionieri italiani nella Grande Guerra). The tendency to compare and contrast Cadorna and Diaz is nonetheless a tempting one; for instance the recent (2014) work by John Gooch, The Italian Army and the First World War, opens with a brief preface explaining how:

Gooch illustrates how General Luigi Cadorna, a brutal disciplinarian, drove the army to the edge of collapse, and how his successor, General Armando Diaz, rebuilt it and led the Italians to their greatest victory in modern times.

In Monticone's much dated work, we also have a first, probably more balanced, broad assessment of the various measures adopted by new Chief of Staff Armando Diaz after his installation. As you mention - together with a far less uplifting narrative covering the attitude of the military and political world towards the half million enlisted men who were taken captive or missed report during the route - the defeat of Caporetto created a new urgency to address the situation of the Italian troops in terms of morale rather than discipline.

From this perspective, Diaz's main quality proved his capability of being more accommodating and conciliatory towards certain political needs and interventions (traditionally conceived within the Military as unduly interference), while, at the same time, taking advantage of the greater sense of general urgency to obtain a generally better treatment for soldiers. A point on which the new Ministry led by Vittorio Emanuele Orlando proved significantly more forthcoming than the weak and inconclusive "national unity" cabinet led by the elderly Paolo Boselli.

This improved treatement manifested itself first and foremost with an extension of leave periods - twice a year instead of once, if I remember correctly - and, more significantly, with the actual respect of promised leave terms (postponement or suspension of leave due to military necessities was one of the main sources of unrest among the soldiers). Food was also improved, reaching a level closer to 3,000 kcal a day, despite remaining still below that of the other Western Armies, so that the Italian soldiers, to quote one of the Undersecretaries to War, were "shrinking less than those of the Central Empires".

Under Diaz, a program of propaganda among the soldiers - which had already been belatedly introduced during mid 1917 under certain Commands (notably Luigi Capello's, and in part the Duke of Aosta's) - was significantly expanded with the introduction of a proper organization handled by the so called "Service P."

More significantly, this propaganda - inspired to basic education methods, along the lines traced by pedagogist and interventionist-volunteer Giuseppe Lombardo-Radice - was aimed directly at the soldiers, by at least attempting (and opinions on its effectiveness are quite conflicting - notably E. Lussu pointed out that those newspapers and leaflets ensured that the soldiers had "no need for toilet paper") to provide the officers with "prompts for conversation" with the soldiers. That is, a double propaganda action: one providing the officers with ideas and material on how to motivate their men, addressing them directly - the other, providing the men with simple entertainment (games, reading, music, even a series of cooking contests) and better conditions, as well as encouraging them to produce their own "trench newspapers"; cutting down subtantially on the stuffy "from above" approach of traditional lectures or public speeches, which the largest portions of the men had very little patience for (on this point, see also Rochat, G ; Isnenghi, M. - La grande guerra - and - Isnenghi, M. - Giornali di trincea)

Overall - obvious as it may appear - the better living conditions, access to forms of entertainment, better and regular turnaround, better food and accommodation, etc. all were consequence of the new political and military circumstances which allowed the Italian Army, which had launched during 1915-17 ten massive (relatively speaking) offensives, to hold its defensive line on the river Piave, facing only one significant enemy action during June 1918. An immediate breakdown of the Italian casualties (461,000 between May and November 1917 - 169,000 from December 1917 to the end of the war, according to Gooch) does offer an obvious argument as to why the soldiers could look more favorably at Diaz's command.

With an average improvement in morale, episodes of insubordination and analogue severe disciplinary issues, appeared to become more manageable (here a breakdown of men found guilty in military court)

year	desertion	indiscipline	self mutilation	surrender
15 – 16	10,272	4,600	1,094	1,800
16 – 17	27,817	6,900	3,118	2,300
17 – 18	55,034	10,000	2,136^a	1,100
until Nov. 18	8,562	3,000	272	100

a - The drop in self mutilation followed the deliberation (19^th of October 1916) to keep those who were found guilty under military supervision [after September 1917, those suspect of self harm were kept apart from regular wounded, in “self mutilators” hospitals], which also meant that their sentence was to be served on the front line, as soon as their injuries allowed it. So that only those who had inflicted themselves permanently disabling injuries (mostly permanent blindness or amputations) would effectivley avoid service.

At the same time, it's not like the character of the Italian military justice - which was, after all, still regulated by the Military Code of the Kingdom of Sardinia-Piedmont of 1859 - had changed substantially. Neither had the attitude of the High Command, or of the "national-interventionist" front, towards the suspect "defeatists" among the military. Indeed certain less than commendable measures were sporadically adopted, such as denying any of the meagre benefits available to the families of soldiers who had been taken prisoners "under suspect circumstances", or even - as requested by various figures of the interventionist front - publicly listing the names of the relatives of "suspect deserters", forcing the families to seek exoneration on behalf of men who were unable to stand trial or to produce the necessary documentation or testimonies.

On similar ground, the High Command approved of the choice of the Italian Foreign Minister not to participate to the international relief for the prisoners of war held captives by the Central Empires; thus contributing, with the absolutely inadequate treatement offered within the Austro-Hungarian concentration and labor camps, to the high casualty rate among Italian prisoners of war. And, while the Italian Foreign Office insisted that the Austrians were expected to provide the Italians with an adequate treatment, without asking for Italy to do anything about it, especially since they were exploiting the Italians for forced labor, there is little doubt that the idea that providing relief to suspect deserters would have undermined the troop's morale and weakened their resolve played an additional role in this deliberation, which was reverted only towards the end of the war.

As to the last point, we again find ourselves somewhere in no man's land. It is true that Cadorna's demotions were often arbitrary and punitive - it is also true that many of the men removed from office were senior officers who were far from inspired and effective commanders, but either stubborn, indiscriminate or actually incompetent to run an actual war. Consequently a certain number of them was reinstated, but - on this aspect - Cadorna's direct attitude did somewhat improve the officers pool, allowing Diaz to enlist the cooperation of a few commanders who had proven, at least, competent enough to escape Cadorna's fury.