The Lion, like Dorothy and the Tin Man, was misguided in what he thought he needed. He believed he was cowardly because he lacked a brain, but in reality, he was simply afraid. The Wizard, understanding this, gave him a meaningless diploma as a way to convince him he was no longer cowardly.
This is a key theme in the book: the power of self-belief. The Lion's true courage comes from within, not from a physical object. He learns that he has the strength and bravery he needs all along.